Gallaher International Ltd v Tlais Enterprises Ltd (Rev 1)

In the first of these two actions Gallaher International Ltd claims that by a letter dated 4^th March 2005 it lawfully terminated a distribution agreement between it and Tlais Enterprises Limited (“TEL”) whereby TEL was appointed as Gallaher’s distributor in respect of certain specified brands of cigarettes. TEL disputes that the TEL Agreement was lawfully terminated and counterclaims over $ 675 million by way of damages. In the second action Gallaher claims against Mr Ptolomeos Tlais, one of the beneficial owners of TEL, under a personal guarantee. In this judgment I use “Gallaher” primarily to refer to the claimant; but, on occasion, to refer generically to the Gallaher group.

The distribution agreement (“the TEL Agreement”) commenced on 1^st May 2002. Prior thereto Gallaher supplied cigarettes on the orders of companies owned or controlled by a Mr Charles Hadkinson, particularly Namelex Holdings Ltd (formerly Namelex Ltd). I refer to this company as “Namelex”. A large proportion of those orders were financed by the Tlais family. From June 2000 Gallaher had had a distribution agreement (“the Namelex Agreement”) with a company called Namelex Trading Agencies Ltd, of which Mr Hadkinson and Mr Tlais were beneficial joint (50/50) owners.

Mr Hadkinson had a number of associates, including a Mr Fadi Nammour, a Lebanese citizen whose family had interests in banking and a Mr Michael Clarke, who later became an employee of TEL.

The Namelex Agreement was terminated in circumstances where (a) JL Spirits and Tobacco, a company associated with Namelex, was a substantial debtor to Gallaher; (b) a large quantity of cigarettes had been manufactured for Namelex by Gallaher many of which had been shipped to Cyprus and Dubai, whilst other quantities remained in the UK; and (c) Mr Tlais claimed to have been given assurances by Mr Hadkinson as to the level of support that Gallaher would provide in the form of free cigarettes which had not been fulfilled, as a result of which he claimed to have suffered severe losses.

It is common ground that Mr Hadkinson, who had been employed by Gallaher for three years in the 1980s, was a rogue, but, so far as the parties are concerned, for different reasons. Gallaher so describe him because he strung them along with promises of letters of credit that never materialised; Mr Tlais because he made false representations to him about the support that he was to receive from Gallaher.

Under the TEL Agreement Gallaher appointed TEL as its exclusive distributor in 15 Territories in the Middle East, Africa and Latin America (“the Territories”) in respect of the Sovereign, Dorchester and Stateline brands of cigarettes (“the Brands”).

Each party had the right to terminate the TEL Agreement forthwith at any time on written notice if the other party committed a material breach of any of its terms and conditions; provided that, in the case of a remediable breach, no such notice could be given unless and until a notice had been served specifying the breach and requiring it to be remedied and 30 days had elapsed without it being remedied. The body of the TEL Agreement also provided, by clause 10 (1), that each party was entitled to terminate the TEL Agreement on 3 months’ written notice to expire on, or at any time after, 1^st May 2007. There is a dispute as to whether the parties effectively agreed an automatic renewal, subject to certain conditions, for a further period of five years until May 2012.

The TEL Agreement, as amended in January 2003, provided that all brands sold by Gallaher to TEL under the TEL Agreement were intended for final sale via distributors to consumers in the Territories: clause 2 (v). Under the TEL Agreement TEL was subject to a number of obligations designed to ensure that that intention was fulfilled and that cigarettes supplied under the TEL Agreement were not smuggled out of the Territories into other markets, including the United Kingdom. Among these was an obligation on TEL to conduct its business in accordance with the Policy on International Trade of the Gallaher Group (the “ITP”). TEL was also obliged to procure that any sub-distributors conducted business in accordance with the ITP: clause 4 (xxi).

In addition the TEL Agreement required TEL to keep “full, proper and accurate accounts and records showing clearly all sales transactions and inventories relating to the Brands”: clause 4 (viii).

Goods manufactured for TEL after May 2002 were, in accordance with clause 3 (ii) of the TEL Agreement, marked by Gallaher with unique pack codes which enabled them to be tracked and traced. A substantial proportion of the goods supplied by Gallaher to TEL were seized by Her Majesty’s Customs and Excise (“HMCE”) (Footnote: ¹) or other Customs authorities.

According to Gallaher the volume of seizures notified by HMCE and other customs authorities in terms of individual cigarettes (“sticks”) during 2002 to 2006 was at least in the region of the following figures (the stock in the third column being inclusive of the stock in the second):

The number of cigarettes seized by Customs authorities is only a small proportion of those smuggled. In “Measuring and Tackling Indirect Tax Losses – 2004” HMCE set out its total seizures over a period of years and its estimate of the volume of cigarettes successfully smuggled in those years. It is possible from that data to estimate the percentage of seizures to total smuggled product as follows:

These percentages are consistent with a specific calculation contained in the ‘Comptroller and Auditor General’s Standard Report on the Accounts of HM Customs and Excise 2004-05’, published 7^th October 2005 which states that “Over that period [2000-04] HMRC believed it had continued to successfully intercept a broadly consistent proportion (around 14.75 per cent) of smuggled cigarettes”.

Since the quantity of goods successfully smuggled can never be known, these estimates must, at best, be broad ones. But they indicate that, in overall terms, it is necessary to multiply the volume of goods seized by about 7 to arrive at the likely volume of smuggled goods. If that factor is applied to the TEL seizures the resultant product implies that virtually all, or, at any rate a very substantial majority of the TEL coded goods sold to TEL that were not destroyed were smuggled.

Gallaher set out and described the breaches that it relied on in its written notice of termination of 4^th March 2005, which it served on TEL on the same day as it commenced the main action. In essence Gallaher relies, firstly, on TEL’s failure to prevent smuggling of cigarettes into the UK and TEL’s alleged complicity in smuggling. It contends that the volume of seizures over a five year period, despite repeated warnings by Gallaher of increasing concern on the part of HMCE and itself and a “red card” (see paragraph 172 below) from HMCE in respect of TEL in January 2005, could not have arisen without breaches on the part of TEL of various obligations under the TEL Agreement. Gallaher relies in this respect on certain schedules of sales made by Adam Trading, TEL’s master distributor, between 2002 and 2005, (the “Adam Trading Schedules”) which showed sales to a number of destinations outside the Territories.

Gallaher also relies on TEL’s failure to keep adequate accounts and records. TEL accepts that it did not keep any accounts during the period of the TEL Agreement (save for one set from 1^st November 2002 to 31^st December 2003 which manifestly fails to record TEL’s level of trading). In order to support its claim for very large damages TEL has had to reconstruct accounts for the entire period. Gallaher say that the reconstruction is flawed, that the problems thrown up by the exercise are the very type of problem that the clause was designed to prevent, and that the failure to keep proper records affords an independent ground of termination.

Gallaher also relies on alleged breaches by TEL of, inter alia, its obligations under the TEL Agreement (a) to supply evidence of shipment of Brands to the appropriate Territory, (b) to sell the Brands in amounts commensurate with the estimated demand in the intended markets within the Territories, (c) not to resell the Brands to any person whom it knew or had reason to believe was engaged in any illegal trade in cigarettes and (d) to resell them only to persons where there was no reasonable cause to believed that such persons would sell them outside the Territories.

TEL denies that it was in material breach of the TEL Agreement, and claims that, if and insofar as it may have been, any such breach has been consented to, waived or acquiesced in by Gallaher, or that Gallaher is estopped from relying on it. It contends that the large quantity of cigarettes seized does not signify any breach on its part. Rather it is attributable to a number of factors including the following:

Gallaher also contends that the terms of the ITP permitted it to reconsider its relationship with TEL and to terminate it if TEL was behaving improperly, or if Gallaher had reason to believe that it might be – as Gallaher contends to be the case.

In addition to its claim for a declaration that it lawfully determined the TEL Agreement Gallaher claims $ 3,239, 450 plus interest, being the price of certain goods that it supplied to TEL on 365 days’ credit. TEL says that it is not bound to make payment because the agreed method of payment, namely a $ 10 supplement on cases of Sovereign, became incapable of fulfilment when Sovereign was removed as a brand in May 2004.

TEL’s principal counterclaims in the main action, as pleaded, are for:

a number of other very large claims.

Gallaher seeks to recover $ 4 million from Mr Tlais under a personal guarantee dated 30^th April 2002. Mr Tlais provided that guarantee to Gallaher in connection with the placement by Gallaher of $ 5,000,000 into a blocked deposit account at Banque du Liban et d’Outre Mer (“BLOM”) in Cyprus.

By a letter agreement dated 29^th April 2002, which Mr Tlais signed, Gallaher set out the terms of the arrangements agreed with BLOM whereby Gallaher would open an account in its own name with BLOM in Limassol and pay $ 5,000,000 into it. BLOM was to pay Gallaher interest on this money at the rate of 5% per annum. The monies in the account were to stand as security against various accounts at BLOM numbered 895296 upon which Mr Tlais and his brothers Fahad and Mohammed Tlais and others were signatories. BLOM agreed not to seek foreclosure of the Tlais’ accounts within a period of five years. During the life of the deposit Mr Tlais was to repay to Gallaher not less than $ 1,000,000 per annum on the anniversary of the deposit up to a maximum of $ 5,000,000. At the end of a period of five years BLOM was obliged to use the deposit monies to cover any debts of the signatories to those accounts and to pay the surplus over to them. The terms of the deposit were set out in a letter of 30^th April signed on behalf of Gallaher and BLOM.

By a letter agreement of 30^th April 2002 Mr Tlais gave to Gallaher his irrevocable and unconditional personal guarantee that if he failed to make any annual payment of $ 1,000,000 in accordance with the agreement set out in the last paragraph he would within six months of Gallaher’s demand reimburse Gallaher the difference between the $ 5 million and the amount that he had repaid Gallaher at the date of the demand.

Mr Tlais arranged for payment of the first of the five instalments in May 2003 by persuading BLOM to release $ 1,000,000 from the deposit account to Gallaher. But he failed to make any further payment, and on 10^th May 2005 Gallaher demanded repayment of the $ 4 million balance.

Mr Tlais’ defences are:

Gallaher says that the obligation to repay the $ 4,000,000 was not conditional as alleged; that Mr Tlais waived any claim for damages for fraud or conspiracy, which is, in any event, ill-founded; and that the parties did not agree the set off claimed. The last of these issues is now moot because Gallaher are prepared to proceed as if such a set off had been agreed.

The facts that underlie the dispute extend over a 6-7 year period and are of considerable complexity. I propose to set out the core facts (including, where relevant my findings on disputed issues) before further identifying the issues (see paragraph 567) and my conclusions on them. In doing so I have adopted the general format of the parties’ final submissions and, on occasion, their summary of events. My conclusions on the relevant issues may be found in the following paragraphs:

Gallaher International Ltd was until 1997, when Gallaher Limited was floated on the London and New York stock exchanges, owned ultimately by American Brands Inc., a US based conglomerate with many interests, including cigarettes. It and Gallaher Ltd, the main UK operating company, were at the material times subsidiaries of Gallaher Group PLC. In March 1999 Gallaher acquired from RJ Reynolds, the worldwide trademarks for Dorchester (excluding some Middle Eastern countries) and Dickens & Grant. In the summer of 2000 it acquired Liggett-Ducat, a Russian cigarette manufacturer and distributor, whose brands included Prima, Novost and LD. In November 2001 Gallaher completed the acquisition of Austria Tabak.

On 15^th December 2006 the boards of Japan Tobacco Inc (“JT”) and Gallaher Group Plc announced that they had reached agreement on the terms of a recommended cash offer made by a JT subsidiary for the entire issued (and to be issued) share capital of Gallaher. The necessary scheme of arrangement received Court approval in April 2007.

Gallaher’s head office is in Weybridge. One of its many factories is in Lisnafallan in Northern Ireland, where it produces all of its cigarettes for the UK market, together with Virginia blend cigarettes for export to markets in Europe and around the world.

In the late 1990s the development of new markets was the responsibility of the New Business Development (“NBD”) division. In September 2002 Gallaher created a new business unit – the AMELA (Africa, Middle East and Latin America) Division - and business in those three markets together with the businesses of Austria Tabak were reorganised into that unit, which, in early 2004, was itself incorporated into the Developing Markets division.

In 1993 Gallaher agreed with BAT to cede to it the Silk Cut trademark outside Europe and to receive from BAT the Benson & Hedges trademark inside Europe. The effect of this was to allow Gallaher to focus on its European business. In the mid 1990s the markets of the former Soviet Union began to open up and Gallaher began to sell its cigarettes, particularly Sovereign and Stateline, into Russia, and then into Kazakhstan. At this stage Gallaher’s international, i.e. non UK, business was divided into four divisions (i) European domestic business; (ii) European duty free business; (iii) the Far East division; and (iv) a trading division. The international business was then a relatively small part of Gallaher’s business, contributing £ 66 million of operating profit in 1998 as against £ 324 million profit from sales in the UK. The figures for 1999 were £ 73 million and £ 347.4 million. Gallaher had no business in the Middle East.

Mr Ptolomeos Tlais, who is also known as Abu Hameed or Abdul Aziz Tlais, comes from a large and powerful family, owning substantial property in Lebanon and Cyprus, including land, restaurants, petrol stations and a partially built hotel. He is a Lebanese national living in Cyprus. He has 10 brothers and 2 sisters. His eldest brother is Fahad Ahmed Ismail, also known as Abu Ahmed (“Abu Ahmed”). Another brother is named Mohammed.

Mr Tlais had been a distributor for a number of international cigarette companies between the mid 1970s and 1998, including Philip Morris, Japan Tobacco and BAT. He ceased to be one because, as he told me, Philip Morris had decided to cease selling cigarettes on a transit basis because of concerns about organised criminal gangs of smugglers and because his family had experienced difficulties with powerful Eastern European mafia groups who wanted to be supplied with cigarettes to smuggle, which the family had refused.

The Tlais family carries on business through the medium of a number of limited companies. In Cyprus their primary trading vehicle is Highstreet Enterprises Ltd (“Highstreet”). This company was established by Abu Ahmed, although the, or a, registered owner is Hassan Albabi, a Bulgarian who used to work with Abu Ahmed and who is a friend of Mr Tlais. The nominal directors are (i) Mr Albabi, (ii) Mr Constantinos (Dinos) Saveriades, who is Mr Tlais’ lawyer, and (iii) Mr Saveriades’ secretary. The beneficial owners are Mr Tlais and Abu Ahmed. Mr Tlais ran its business and signed on its behalf.

Mr Tlais was the owner of 50% of Namelex Trading Agencies Ltd, a company created by Mr Charles Hadkinson for the purpose of entering into the Namelex Agreement with Gallaher on 5^th June 2000 – see paragraphs 111-115 below. The other 50% was beneficially owned by Mr Hadkinson.

TEL was beneficially owned (Footnote: ²) by Mr Tlais and Abu Ahmed. They were both directors, together with Mr Saveriades. It came to be established because Gallaher wanted a clean break at the end of the Namelex era so that they no longer dealt with Highstreet; and to have a new distribution agreement with a different company.

These are two companies in the Tlais family stable. Mr Tlais’ connection with them is somewhat unclear. Tlasco Trading Company (sometimes known as Tlasco Company for General Trading, Import and Export) is a Lebanese company, owned by Abu Ahmed, Mr Tlais’ brother, in which Mr Tlais had no role, save as a family member in respect of a family business. It acted as TEL’s sub-distributor in the Lebanon. TEL has, however, disclosed Tlasco invoices to a company called CT Tobacco which match dealings on an account of CT Tobacco with Tlais Trading (“the CT Tobacco account”), which has also been disclosed.

Tlais Trading Company Limited was also a Lebanese Company which Mr Tlais transferred to his brother some time between 1998 and 1990, when he became a citizen of Cyprus. Mr Tlais’ evidence was that he stopped doing business through that company. But the CT Tobacco account is a statement of account from May 2000 down to autumn 2001 with Tlais Trading, and Mr Tlais appears to rely on the balance of about $ 5 million due to Tlais Trading shown in it as part of his $30 million claim: see paragraphs 1163-1193 below. Tlais Trading Company Limited, under Mr Tlais’ signature, issued invoices for goods sold to Iran in the TEL era.

A number of features distinguish one brand of cigarette from another. One feature is the image of the brand. Imported brands, especially if imported from markets associated with quality cigarettes such as the UK and the USA, are usually much preferred to domestic brands. Another is taste, which may be a smooth “Virginia blend”, a more flavoursome “American blend”, or other blends, including cigarettes with flavours such as menthol. Another is tar content, some consumers preferring, and some legislation requiring, lower level tar cigarettes (“Lights”). Lastly there is price, which is often put into three categories, which may overlap: premium (or super premium/luxury); mid-price and value/low price. These three segments apply to imported cigarettes. Locally produced cigarettes may form a still lower price category since they can often be produced more cheaply on account of a more favourable tax regime.

The brands the subject of the TEL Agreement were as follows:

Gallaher also owned a range of other brands outside the EU including Ronson, Sobranie, Memphis and LD. Ronson is a low- to mid-price Virginia brand marketed mainly to Africa. Memphis is a mid-price American blend. LD is also usually an American blend, generally in the low-price segment. Sobranie is a premium brand, sold in a number of variants.

Cigarettes in the Territories the subject of the TEL Agreement, were usually sold in packs of 20 cigarettes (“sticks”), wrapped in “outers” of 10 packs (200 sticks) and packed in cases containing 50 outers (10,000 sticks). A 40 foot shipping container will hold about 800 cases (8 million sticks). Prices are normally quoted either in $ per 1,000 or in $ per case.

The rate of tax and duty charged on cigarettes and tobacco, particularly in the UK (where there is a high specific duty based on the number of cigarettes rather than their price), is so high that very large sums of money can be made, illegally, by importing cigarettes into a territory without paying the tax and duty due. Commensurately large sums are lost by the Customs and Revenue authorities (and thus the taxpayers) of the territories concerned. Smuggling is widespread. The US Department of Agriculture estimated that in 2002 929 billion cigarettes were exported worldwide but only 624 billion officially imported.

The same factors make the sale of cigarettes to a tax free or low tax destination a potentially attractive opportunity. Thus it was that, following a substantial tax increase on UK cigarettes in 1993, exports from the UK to Andorra, which is not within the EU, increased from 13 million sticks in 1993 to 1.52 billion in 1997. In the period from 1995 to 1997 Gallaher’s exports to Andorra increased by a factor of 6, whilst those of Imperial Tobacco increased 35 – fold. This volume of imports was such that every Andorran man, woman and child, would have had to be smoking about 140 cigarettes a day to match the number of cigarettes imported. Large quantities of these imports must have been smuggled out of Andorra. Cigarettes made in Gallaher’s factory in Ballymena could return to the UK in a week.

Given the scale of tax losses resulting from such smuggling, OLAF, the EU anti-fraud unit, sent in an investigation team. It noted that, although imports of brands popular in the UK and Eire had significantly increased, Andorrans had not suddenly acquired a taste for such brands; rather imports were far in excess of demand. Following this investigation the Spanish and Andorran authorities had a crackdown on smuggling.

The EU’s chief fraud investigator expressed the view that cigarette manufacturers must have been aware that the sudden increase in Andorran imports could not be explained by legal supply to a normal commercial market; and that it was difficult to see how they could avoid knowing that they were selling to smugglers. Gallaher realised (and said publicly) that its increased sales were probably attributable to the smuggling of its product into the UK: see its 1997 Annual Report and the evidence of Mr Peter Wilson, Gallaher’s then Chairman and Chief Executive, to the House of Commons Select Committee on Thursday 27^th January 2000.

The stance that Gallaher then took (it was to change over the course of 1999-2000 (Footnote: ³)) was that, provided the sales that it made were legal, what happened to the cigarettes afterwards was not its concern. On the BBC Money Programme on 8^th November 1998 Mr Wilson said:

“We will supply our cigarettes wherever there is a legal, legitimate demand for them, knowing that if we don’t, someone else will.”

[Interviewer] “Even if they’re going to be smuggled back to this country and you know they’re going to be smuggled back to this country”

“We will sell legally to our distributors …. If those distributors subsequently sell those products on to other people who are going to illegally bring them back into this country, that is something totally outside our control and is a direct function of the enormous levels of tax in this country compared to the levels of tax on cigarettes in other countries ”.

When it was suggested to him that Gallaher could just stop supplying such distributors he said that that would do nothing to influence the degree of smuggling because the smugglers would just bring back someone else’s product.

This approach, driven by a desire for profit and adopted by other tobacco companies at the time, was not the action to be expected of a responsible international company, as Mr Goel, Gallaher’s expert accepted. Gallaher and other tobacco companies were producing and supplying goods greatly in excess of legitimate demand in the knowledge that a substantial proportion would end up being smuggled.

“Domestic duty paid” business is what its name implies. The manufacturer (or a distributor) sells directly to a distributor in the country concerned which is the final destination for the product. Duty is paid as the cigarettes enter the market. In “Domestic duty free” business the goods are sold to the intended destination but without payment of duty because the cigarettes are to be sold in duty free outlets or zones.

International tobacco companies also engage in “transit business” or “transit trade”. Whilst these terms have no exact definition they characteristically involve the sale of goods to wholesalers/distributors in intermediate markets without the payment of duty (as the goods have not reached their final destination), which are then sold on to other markets. Some of this business results in the goods being exported back to high duty markets, such as the UK, without payment of duty. The goods will then be sold to the consumer at a much lower price than that payable for duty paid goods. As a result, whilst it is obvious that not all goods “in transit” are being smuggled, the expressions “transit business” or “transiting” or “transit trade” have become, for some people, a euphemism for smuggling (i.e. importation without payment of the relevant duties or in breach of import controls or restrictions), or at least for the supply of goods where there is good reason to believe that they may end up being smuggled.

Tobacco companies also engage in “trading business”, which again lacks exact definition but involves the sale of cigarettes at low cost and with minimal brand support to distributors who will legitimately sell them in one or more markets.

A Gallaher disclosed document of uncertain date and provenance (Footnote: ⁴) headed “Transit and Trading” describes “trading” as “selling on a “cost plus” basis with minimum support in the expectation that the goods will remain in the primary market” and “transit business” as “selling close to normal market price in the expectation that the product will enter a secondary market without payment of full duties”. It describes the “Reasons to transit” as “To enter a closed market; to overcome import quotas; to mitigate duties”.

In the late 1990s Gallaher was increasingly interested in developing new markets overseas. This was for a number of reasons. Russia’s economic collapse and the fall in the value of the rouble in 1998 had brought with it a very sudden downturn in sales. Duty free sales in Europe were soon to be abolished; and sales in European markets had been diminishing or stagnating in the light of increasing taxes (particularly in the UK after the change of government in 1997), advertising bans and increased public awareness of the risk to health posed by smoking. The export of large volumes to Andorra had been severely curtailed; and demand for Gallaher’s brands had declined in the UK.

At the same time Imperial Tobacco, Gallaher’s major competitor, which was then generally regarded in the City as being more successful in adapting to the challenges that the industry faced, was supplying significant volumes to the transit market which were being smuggled back into the UK, undercutting Gallaher’s domestic duty paid brands.

Gallaher was reluctant to reduce production levels at its Lisnafallan factory, which it had recently equipped with ultra high speed manufacturing units, because it wished (a) to avoid redundancies; and (b) to enjoy economies of scale by ensuring that its factory was run at full capacity.

Gallaher decided that, in respect of AMELA, it would establish a “trading” business. Instead of investing heavily in advertising and marketing so as to build the reputation of its products (“building brands”) and establishing its own distribution network, or acquiring factories of its own in target territories, or appointing and itself supervising in-market distributors with their own distribution network, Gallaher would focus on selling to regional distributors who would themselves build up the market. Gallaher would keep the price low with a view to those distributors stimulating demand in their territories. In the long run it hoped to move in and take control of what would have become an established and flourishing market. But in the early stages Gallaher’s main interest was simply to sell as much as possible and get paid for it.

Mr Wilson specified the approach to be taken in a memorandum of 14^th May 1999 circulated to Gallaher’s senior management outlining Gallaher policy:

“The essence of trading business is that we are not seeking to build brands. To some extent, this position is forced upon us by the fact that we do not own our premium brands outside Europe. However, we do own Sovereign, Mayfair, Dickens & Grant and Dorchester in most markets, and it is acceptable to use those brands (i.e. Sovereign Black) for trading opportunities on the clear understanding, to be confirmed by any customers, that they will not sell on for re-shipment back into the UK. The established reputation of these brands in the UK could be exploited in trading markets such that they could sell for a higher price than Sovereign Classic, etc”.

By “trading opportunities” Mr Wilson meant selling to distributors for on-sale by them to a number of markets.

Smuggling began to become a matter of significant concern to HMCE in the early 1990s. The implementation of the single European market in 1993 and the subsequent relaxation of the limits previously imposed on travellers bringing cigarettes in from abroad for personal consumption meant that smokers in the UK became more accustomed to smoking cigarettes manufactured and sold abroad. Reduction in border checks reduced the risk of detection for smugglers and the increases in taxes on cigarettes at above the annual rate of inflation increased the willingness, and the economic incentive, for UK smokers to smoke cigarettes with foreign pack markings, if cheaper.

Over the course of the 1990s HMCE’s concerns increased. When in 1999 HMCE quantified, for the first time, just how much revenue was being lost by smuggling, the issue became one of political significance. The Government appointed a Tobacco “Tsar” to make recommendations on how to combat tobacco smuggling, which he did in November 1999. In response HMCE developed a concerted plan of action to tackle smuggling and on 22^nd March 2000 the Government published its strategy “Tackling Tobacco Smuggling”. In July of the same year Mr Nigel Northridge, who had become Gallaher’s Chief Executive in January 2000, wrote to the Prime Minister expressing the belief that one third of the cigarettes smoked that year would be smuggled.

A key part of HMCE’s strategy for tacking tobacco smuggling was to secure the co-operation of tobacco manufacturers, a task undertaken by Mr Terry Byrne, then one of the Commissioners for Customs and Excise, who gave evidence.

Whatever may have been the apparent indifference displayed by Mr Wilson in his 1998 interview to the fate of Gallaher’s cigarettes after they had been legally sold, it is apparent to me that smuggling of tobacco was by 2000 a matter of considerable commercial concern to Gallaher; and that personnel in Gallaher at a senior level aimed to cooperate with HMCE.

As to commercial concern, smuggling of cigarettes may increase the overall volume of goods sold but, insofar as it reduces the quantity of cigarettes sold by Gallaher in developed markets such as the UK, it reduces sales in Gallaher’s most profitable market to an extent that may be difficult to match by any increase in low margin sales. It also undermines the position of Gallaher’s distributors, who expect the manufacturer to play a part in protecting their interests, and who may be tempted to favour rival bands, if it does not. It also involves a lack of control of the supply chain and a disorderly market.

It was in Gallaher’s interests to co-operate with HMCE both because smuggling was against its commercial interests in the respects to which I have referred, and because, if it did not cooperate, or was thought not to be doing so, it might appear either indifferent, or, at worst, a party, to illegal tax evasion; with a resultant risk to its reputation, and the possibility of unwelcome governmental measures or involvement in civil or criminal proceedings.

Gallaher’s cooperation came in several different forms including (i) providing HMCE with the results of pack swap surveys (Footnote: ⁵) which produce information about the type of cigarettes currently circulating in the UK market, which can be used to assess levels of non-UK duty paid cigarettes smoked in the UK; (ii) regular meetings between HMCE and Gallaher representatives; (iii) alterations to the make-up of packs to make it easier to distinguish smuggled product; (iv) provision of monthly sales data in respect of overseas sales of goods manufactured by Gallaher in the UK as well as details of Gallaher’s customers; and (v) routinely assisting HMCE with “track and trace” requests, where Gallaher would examine samples of seized product to see whether it was genuine or counterfeit, when and where it was made, and for what markets, and providing witness statements verifying this information.

TEL contends that whatever public stance Gallaher, in company with other cigarette manufacturers, was constrained to adopt in the face of political and regulatory pressure, it was in truth content to acquiesce in, and had no particular concern about, smuggling, provided that it was not smuggling into the UK or, latterly, elsewhere within the EU. Gallaher, TEL submits, remained focused on volume selling to international markets with little concern for the legitimate demand for its brands in those markets and regardless of whether its products might enter some markets illegally.

Reliance was placed in this respect on a World Health Authority report in 2003 on “The cigarette “transit” road to the Islamic Republic of Iran and Iraq. Illicit tobacco trade in the Middle East”. This concluded that smuggling occurred with the compliance of the cigarette manufacturers; and that the strategy of the international tobacco companies in Iran had been to penetrate the market through illegal imports; weaken the state monopoly’s market share by this means; next convince the authorities to authorise legal imports or production of foreign brands; and then stop fuelling the illegal market and operate in a legal way. Smuggling was difficult to combat given the absence of adequate marking of tobacco products with details of the chain of sale and by the existence of the transit regime. Other reports contained a similar message.

The utility of this evidence, which marries up in some respects with the Gallaher document referred to in paragraph 54, is reduced by its generality and its date. The Andorran episode shows that Gallaher was in the late 1990’s indifferent to whether its products ended up being smuggled. It does not follow that the same indifference, or worse, subsisted over the following years.

The individual at Gallaher who was put in charge of Gallaher’s trading business from its inception was Mr Norman Jack. He was formally appointed to the role in about April/May 1999, when the New Business Development division took shape. He became the Divisional Manager responsible for the development of sales in emerging markets. Mr Jack was a long time Gallaher employee. He had held a senior role in national sales in the UK and had recently taken charge of managing Gallaher’s sales in the CIS. He was not, however, one of Gallaher’s senior executive management.

Mr Jack reported to Mr Nigel Simon, the Gallaher director responsible for its international division, and occasionally consulted Ms Sue Jones, whose job title was Finance and Operations Director, on finance matters and Mr Christopher Fielden, Gallaher’s Group Legal Director until November 2002, on legal and regulatory matters. But he enjoyed a large measure of autonomy. Gallaher came to regard him as having become far too close to Mr Tlais.

The price charged in respect of trading business took account only of the variable or direct costs of making the product (“marginal costing”) as opposed to a price (“full costing”) which took account of all direct and indirect costs and, included, therefore, the cost of depreciation of machinery and fixed assets. The aim was to make £ 1 of margin for every thousand cigarettes. Sovereign Classic and Dorchester International were the Virginia blend brands selected as the core of the trading business. Mr Jack’s approach was to appoint master distributors in a number of different regions.

Mr Jack told Mr Nigel Espin, Group Security and Brand Protection Manager, on more than one occasion after he joined Mr Espin’s department in September 2004, that, when he took responsibility for the Middle East in 1999, he was asked by Mr Wilson to develop a trading business which would match the level of export volume achieved by IT. He said that this involved selling high volumes, without being concerned about precisely where the goods ended up, even though there was a risk that some might come back to the UK. He said that Mr Northridge and Mr Simon, neither of whom gave evidence, were aware of this strategy.

Mr Espin thought that the idea that Mr Wilson asked Mr Jack to conduct a trading business which involved selling without being concerned about the goods coming back to the United Kingdom was a “war story” told to impress him as a new arrival (he had arrived in December 2003). Since Mr Wilson displayed a similar lack of concern in respect of supplies to Andorra it seems to me that he may well have expressed such a view to Mr Jack in 1999. His memorandum of 14^th May shows that he was concerned that no one to whom Gallaher sold should sell for re-export to the UK. Gallaher did not want its cigarettes coming back to the UK because of the impact that would have on the home market. But he may well have been less concerned if they ended up somewhere else.

Mr Jack appears to have recognized that the trading business he was building up might lead to smuggling. In 2000 he produced a paper in which he put forward a target of 10 billion cigarettes per year from the trading business. In it he observed that dealing through master distributors would give a manufacturer a “necessary degree of separation from some of the harsher market realities”, one of which, I infer, was that distributors further down the chain might be smugglers.

A number of aspects of Gallaher’s trading business gave rise to a risk of smuggling. These included (i) the fact that Gallaher supplied large quantities to Namelex without, according to Ms Jones any detailed due diligence; (ii) the fact that the goods were shipped to Cyprus and not to their ultimate destination; and (iii) that most of the cigarettes had health warnings in English.

As to (i), Ms Jones’ evidence was that distributors were told not to sell back into the UK and to let Gallaher know where the product was being sold, and that there were market visits. Apart from that no other step was considered to ensure that the product was going to the right place. As to (ii), the supply of goods to a destination in which they are not intended to end up increases the likelihood that they will end up being smuggled. The shipper will not know the person to whom they are ultimately to go and cannot gauge the demand which they are to be used to satisfy. As to (iii), cigarettes with an English health warning have a cachet which makes them more acceptable to consumers and, therefore, smugglers.

Mr Clarke’s career has been spent largely in the retail sector. In the late 1970s he worked for a convenience retail company called Sperrings, where he met and was trained by Mr Hadkinson. Mr Hadkinson, who has a Lebanese mother and speaks Arabic, left Sperrings and after a short period in the UK went to work in the Middle East. In the 1980s he was a regional manager of Gallaher’s Middle East division.

Mr Clarke kept in touch with Mr Hadkinson with whom he got on well. In the summer of 1997 Mr Clarke met Mr Hadkinson and Mr Fadi Nammour in Cyprus, where Mr Clarke owned a property. They told him about their businesses, and, in particular, the HRH Group. This was said to have numerous commercial activities including commodities trading and consumer product trading on an international scale. Mr Hadkinson asked Mr Clarke to join him in the business, telling him that he would be fully involved, would have a free role in the HRH Group, and would share profits with himself and Mr Nammour.

Mr Clarke was introduced to Mr Richard Reynolds, a respected UK businessman and former main board director of National Grid Plc, who was the executive Chairman of the Group. Mr Clarke was appointed a director of, and made a minority shareholder in, H & R Distribution Ltd (“H & R”), which was based in Warwickshire. He remained a director until he located permanently to Cyprus in 1998 where he worked for H & R and companies in the Group in various ventures not including tobacco.

Namelex Holdings Ltd (“Namelex”), previously Namelex Limited, was a member of the HRH Group. It had had some involvement in the tobacco business. It became the ostensible purchaser of cigarettes from Gallaher between 1999 and 2002. Mr Clarke became a director of Namelex in late 1998. The other directors appear to have been Mr Fadi Nammour and Mr Richard Reynolds.

In late 1998 Mr Clarke visited Georgia with a colleague to discuss, inter alia, the importation of pharmaceutical products. During the visit his colleague met several cigarette importers. Mr Clarke was then asked to contact several tobacco companies, including Gallaher and IT, to enquire about purchasing a consignment of cigarettes for distribution in Georgia. This was Mr Clarke’s first involvement in the international cigarette business.

Mr Clarke contacted Mr Jack, then in Moscow, with a view to Namelex purchasing two containers of Sovereign Red. Nothing came of this because Gallaher’s price was unacceptable to the end customer. But in April 1999 Mr Jack got in contact with Mr Clarke. In a telephone conversation he told him that Gallaher was restructuring the business and expressed interest in developing business with the HRH Group in the Middle East.

After this conversation a meeting took place between Mr Clarke and Mr Jack at Chilworth, just outside Southampton, in order to discuss how the HRH Group could work with Gallaher to sell its brands in the Middle East. Mr Jack made it plain that Gallaher was interested in volume selling (Footnote: ⁶). Mr Clarke’s evidence was that, during the course of the conversation, Mr Jack asked if the HRH Group was involved in smuggling and made it clear that Gallaher realised that there would be “leakage” of product back to the UK and elsewhere; but would be relaxed so long as HRH Group were not smugglers and were not selling to smugglers. Mr Clarke assured him that the HRH Group did not and would not sell to smugglers; and was told that, if HRH mirrored Gallaher’s policies and procedures they could never be accused of any illegality. I have no reason to doubt this evidence and accept it – Mr Jack’s comments would not have been inconsistent with the approach that was being taken by Mr Wilson.

Mr Clarke and Mr Jack identified the need to work with partners who would provide the finance necessary to purchase the cigarettes from Gallaher and who would have the contacts necessary to promote the brands.

In May 1999 Mr Jack came to Cyprus to discuss HRH Group’s plans for developing business in the Middle East and North Africa. He made it plain that Gallaher’s prime objective was to compete with IT’s export business. It was agreed that H&R would solicit orders for, inter alia, Sovereign Gold and Silver, in North Africa (east of the Algerian/Libyan border) and in the Middle East but excluding Afghanistan. This would be for both domestic and duty free business but would exclude the open Cyprus market. Payment was to be by Letter of Credit with credit of 90 days after invoice. Prices for different brands were agreed. The business was agreed on the basis of Mr Clarke’s assurance that H & R would do their utmost to ensure that the product was sold on the basis that the goods would not be returned to the UK market: see Mr Clarke’s letter of 19^th May 1999.

The basic model agreed was that Gallaher would manufacture goods on the strength of a Namelex order which was to be funded by a third party. Gallaher would then ship the consignment to a bonded facility in Cyprus – such as Attheshlis Bonded Stores Ltd. If payment by letter of credit had not already been secured, Gallaher would retain title to the goods. Namelex would then pay the storage charges for the goods and would introduce a customer who would pay Gallaher directly.

Gallaher’s trading strategy aimed at achieving high volume rather than high profit in the opening years; and did not involve spending on advertising or product promotion (other than some point of sale material). Some form of support was, however, necessary to persuade distributors to buy, promote and distribute Gallaher brands. This support took two forms – rebates and free goods.

As a result of the discussions in May 1999, the manner in which business was conducted was that Gallaher would issue invoices for the goods supplied at the full price and would then pay Namelex or some other company nominated by it, such as Quickbeam Enterprises Ltd or Intoco Overseas Ltd, what were termed “commission payments”, “rebates” or “marketing allowances”. Since the opener of the letters of credit paid the full price, it was unaware of the commissions or rebates that were being paid out of it. The ultimate beneficiaries of these rebates were Mr Hadkinson and his associates.

Gallaher also agreed to provide some goods free as a bonus. Thus the first 50 containers of Dorchester International were provided on a 1 free out of every 10 basis. By a letter to Mr Clarke of 3^rd April 2001 Mr Jack proposed that 10% of the goods should be free, provided certain targets were met. Thereafter the amount of free goods to be provided was determined by Mr Jack, and some of the rebate was also provided in the form of free goods.

The idea was that Namelex in turn would provide free goods to its sub-distributors, in order to encourage them to promote the new brands at a non-discounted price. As trade grew, sub-distributors could then be weaned off free goods so that the price received by Namelex rose. This was thought to be more attractive than offering cigarettes at an initial discount and then removing it, on account of the apparent sensitivity of Middle Eastern consumers to increases in the price of products. Namelex’s customers would be told that the free goods came from Gallaher – as a means of showing that Gallaher was committed to the business and was providing support to the end customers.

In a memo attached to an e-mail of 5^th September 2001 to Mr Northridge and others Mr Jack explained that:

“.. [Namelex’s] understanding of our start point was that we wanted volume and profit from day one and were not prepared to take credit risk. They therefore set up a duality, where Gallaher were paid on a secure basis at a level higher than the actual invoice price, with a proportion of the rebate thus due being paid in free goods: at the same time, they presented their business to their partners as one in which Gallaher invested heavily in free goods to support the market, thus securing the partners support and commitment. They added additional volumes of free goods from their own resources and gave open credit to their customers on an unsecured basis”.

According to Mr Jack’s memo the thinking behind this arrangement was that, after 12-18 months, a turning point would be reached where the prices effectively charged for goods would be on a rising trend, allowing more profit to Gallaher and Namelex, which would justify the risks taken at the early stage. But these expectations were confounded by a problem that arose in respect of product that was or became spotted. Thereafter, according to the e-mail, Namelex (i) replaced spotted stock in the market and sold the recovered stock at a loss “in markets where they did not operate”; (ii) gave additional free goods to allow reductions in price to achieve quick sell through; and (iii) extended further credit to distributors, presenting to their partners downstream that “this was a fully funded Gallaher initiative, which would be consistent with past practice of our multinational competitors”.

The quantity of cases supplied by Gallaher free of charge over the course of the Namelex era was sizeable: a total of 648,919,000 cigarettes i.e. nearly 65,000 cases, to Namelex or Namelex related companies, of which 282.5 million were Sovereign Classic for Highstreet.

Trading with Namelex began on the basis that if a sufficient volume was achieved after a trial period, Namelex would be given a contract granting them exclusive distribution rights for certain territories and brands.

As is apparent from paragraph 87 above Gallaher did not want to take the credit risk and Namelex did not do want to do so either. That was to be borne by others. Namelex and other companies were to earn profit from rebates paid or free goods supplied by Gallaher to the extent that the rebates were not used to buy goods to be provided free (or the free goods were themselves provided) to sub-purchasers.

Despite the fact that Mr Clarke and Mr Nammour, who was also a director, were in day to day charge of the Namelex business, Mr Clarke’s evidence was that he had no contact with the financial side of the business which was the responsibility of Mr Nammour as was shipping. He was thus unaware of a continuing build up of Namelex’s indebtedness to Mr Tlais in respect of free goods promised. Mr Hadkinson did not involve himself in the day to day operation of Namelex. In 1999 Mr Clarke found some customers in Djibouti and Dubai; but, following criticism by Messrs Hadkinson and Nammour that he had agreed too low a price, his involvement with the sales side steadily declined.

One of the first customers introduced by Namelex was a company called Tbeili Group SAL (“Tbeili”), which placed an order worth about $ 1.2 million in the late summer of 1999. Another was Mr Tohme. These customers appear to have been told by Mr Hadkinson and/or Mr Nammour that Namelex had secured customers who would pay them for the goods they were financing, so that they would secure a quick profit. This turned out not to be the case and the companies came under financial pressure.

The product initially supplied to Namelex consisted of Sovereign Black, Dorchester Black, and Mayfair which was in packaging originally produced for the UK domestic market with English health warnings and English pack design. Cigarettes thus packed would be attractive to smugglers, and would have some lack of attraction to legitimate distributors because these brands were not in demand in the territories supplied by Namelex and were sold to it at a high cost. They were also in paper outers, and not the hard outers favoured in the markets in which Namelex was dealing, and which Namelex had sought. According to Mr Clarke the price was

On 24^th September 1999 Mr Jack told Mr Clarke that two orders in hand for Sovereign Black and Mayfair would have to be postponed. Gallaher had decided to stop supplying cigarettes (other than for supply to duty-free outlets, the armed forces, and Gibraltar) with pack markings identical, or practically identical, to those used for UK domestic cigarettes, a practice about which HMCE had been highly critical since it believed that it increased the risk of smuggling. Gallaher had also decided that it would implement this decision immediately and destroy existing materials and packed stock. Mr Clarke’s evidence, which I accept, was that he had warned Mr Jack from the beginning that to sell these brands at these prices and in this format would lead to them being smuggled (Footnote: ⁸). Quantities of Mayfair King Size supplied to Namelex were in fact seized in 2001 (3.2 million), 2002 (24.8 million), 2003 (11.2 million), 2004 (3.5 million), 2005 (3.3. million) and 2006 (4.2. million): see Schedule A2 to the Amended Particulars of Claim (“APOC”).

In its place Gallaher manufactured cigarettes with an English language health warning on the side, as opposed to the front. This is known as a “global English” health warning. Gallaher’s current policy is to insist on market specific health warnings except for the duty free market.

Namelex needed to find an alternative financier who would purchase Tbeili and Mr Tohme’s cigarettes and finance the ongoing business. The Tlais family came to fulfil that role.

In late 1999 Mr Hadkinson, who had known Mr Tlais for several years, contacted Mr Tlais and told him that he had been given the right to sell Gallaher’s brands worldwide, except in the UK and Western Europe, in order to build an international business for them. He said that Gallaher was a fantastic company, for which he had worked, and that Mr Northridge, the now Chief Executive, had worked for him in the past and that they remained close. He represented himself as having influence with Gallaher and said that Gallaher was committed to building a business for their brands in territories that Mr Tlais knew about.

Mr Tlais was reluctant to consider doing business at first, particularly when he was told that Gallaher was asking $ 110 a case for Sovereign and $ 90 for Dorchester, prices which he regarded as far too high if Gallaher intended to build a domestic business from nothing. Mr Hadkinson said that he appreciated this, as did Gallaher, and that he could ignore these prices. He should focus on generating demand in domestic markets at whatever initial price was appropriate and Gallaher would compensate him for the loss that he made on each case at the price at which he had bought it. Mr Hadkinson indicated that, if things went forward, Mr Tlais should contact him before making a sale in order for Mr Hadkinson to confirm that Gallaher would provide the free goods necessary to make up the loss to be incurred in selling at that price. He pressed Mr Tlais to take on the Gallaher business.

Mr Hadkinson indicated that he wished to concentrate on Russia. Mr Tlais expressed a wish to focus on the Middle East and, in particular, Iran, where he believed there was high potential. Mr Hadkinson said that, if all went well, Gallaher would offer Mr Tlais an exclusive distributorship for a wide range of territories.

A little later at a meeting in Dubai with potential distributors, predominantly from the Iranian market, the distributors suggested that business should start with 6,000 cases free of charge and then 6,000 cases for month at $ 30 per case. Mr Tlais said that there was no way that that level of support could be provided. Mr Hadkinson suggested that it might be possible if the price rose by $ 5 per case per month until the $ 90 and $ 110 levels were reached. The next day Mr Hadkinson reported that Mr Northridge had confirmed that Gallaher would provide support in the form of the free goods necessary in order to avoid a loss if sub sales were made at those prices.

Mr Hadkinson repeated Gallaher’s willingness to provide support in the form of free goods in this way on other occasions and Mr Tlais agreed that his family would finance the purchase of goods from Gallaher at the full price notified by Mr Hadkinson and would agree for them to be sold at a fraction of their price, in order to build the business up, on the footing that Gallaher would make up the difference in free goods.

Gallaher had agreed to provide rebates and some free goods to Namelex. But it had not agreed to underwrite Mr Tlais’ losses with free goods or to enter into any agreement with Mr Tlais, and Mr Hadkinson had no justification for saying that it had.

Mr Tlais was prevailed upon by Mr Hadkinson to purchase the balance of the unsold stocks originally supplied to Mr Tohme (Mayfair) and Tbeili (Sovereign and Sovereign Red). Mr Hadkinson had told him that Gallaher had asked Mr Tlais to help them out and that it would be a starting point to continued business and a long term exclusive distribution agreement. According to Mr Tlais Mr Hadkinson said that Gallaher would later buy the goods off him, or direct him to sell them to a particular market or provide free goods to the value of the credit.

Thereafter the Tlais family financed letters of credit for the purchase of further consignments of goods, becoming the principal financier of the purchase of goods from Gallaher under letters of credit. The way in which it worked was this. In 2000 and 2001 letters of credit were opened on Namelex’s account. Mr Hadkinson or Mr Nammour would tell Mr Tlais what letters needed to be opened. Mr Tlais or his brother would give instructions to the bank, which would open a letter of credit which referred to Namelex as the applicant. When the letter of credit was honoured by the bank payment would be debited to Abu Ahmed’s private account. The bank held security over family assets.

Mr Jack had indicated to Mr Clarke that Gallaher would enter into an exclusive distribution agreement for a number of territories in the Middle East, Africa and Asia, if Namelex showed that it was capable of selling sufficient volumes. Negotiations for such an agreement took place between Mr Jack and Mr Nammour.

Although discussions had proceeded upon the basis that the TEL Agreement would be between Gallaher and Namelex, in the event it was agreed that it should be between Gallaher and Namelex Trading Agencies Ltd (“NTA”). Mr Tlais owned 50% of NTA. The other 50% was owned by a company (Cymanco Services Limited), which was a nominee, directly or indirectly, for Mr Hadkinson. The directors of NTA, on incorporation in April 2000, were Messrs Reynolds, Fadi Nammour and Clarke, and shortly thereafter Messrs Tlais, Abu Ahmed, and Saveriades.

The Namelex Agreement – between Gallaher and NTA – was signed by Mr Jack on behalf of Gallaher and Mr Clarke on behalf of NTA at the offices of H & R Distribution in Warwickshire on 5^th June 2000. It became apparent to Mr Tlais at this meeting that Mr Hadkinson did not in fact have any written agreement with Gallaher giving him or his companies a right to distribute Gallaher’s brands. After the signing of the TEL Agreement Mr Tlais and his daughter went for lunch with Mr Clarke, who had only met Mr Tlais a couple of times before, and Mr Jack at a nearby restaurant and continued to discuss the business and its expected profitable future. Mr Jack assured Mr Tlais that Gallaher intended to build a long term business based on the development of key brands.

The Namelex Agreement specified as brands Dorchester International and Dorchester International Lights “and such other brands as may be agreed” as the relevant Brands (clause 1(i)), and the Territories as “the domestic duty-paid market and the duty-free market” in a range of Territories in the Middle East, Africa, and Asia: Schedule 1. These included all the territories that were later to be included in the TEL Agreement, save Latin America, and a number of others, notably India. The TEL Agreement required Namelex to comply with all laws and regulations applicable to or affecting the importation of the Brands into the Territories (clause 3(vi)); to pay all duties taxes and other imposts necessary to enable the Brands to be lawfully imported into and sold in the Territories (clause 3(xiv)); not to resell the Brands except in the Territories and to resell them only to persons or firms where there was no reasonable cause to believe that such persons or firms might sell them outside the Territories (clause 4(iv)), and to impose a like obligation on its own distributors (clause 4(v)). Brand extensions and additional territories were added by letters between Mr Jack and Mr Clarke, expressly “conditional on goods remaining in the markets for which they are supplied”.

The importance of the Namelex Agreement to Mr Tlais was less than might at first appear. It was negotiated without reference to him. He regarded himself as having been made a shareholder in NTA merely as a gesture of goodwill on Mr Hadkinson’s part. He played no part in the management of NTA and NTA held no board or management meetings. According to Mr Clarke NTA did not sell anything. It is doubtful whether it did anything at all.

It is convenient to refer to the period between 5^th June 2000 and 30^th April 2002, when the TEL Agreement was signed, as “the Namelex era”. The general pattern of trading during this period was as follows. Namelex, in the person of Mr Hadkinson, Mr Nammour or one of two other Hadkinson associates, would place orders on Gallaher for goods; and Gallaher would manufacture them to order. Neither Mr Tlais nor Highstreet nor any other Tlais company had any involvement in ordering, with the exception of certain orders for Latin America and Syria. Gallaher would ship the goods, at its expense, to Cyprus, and later to Dubai as well. The goods would then be stored in bonded warehouses with Gallaher retaining title to them. Namelex would be responsible for the costs of storage. The goods would be sold ex-bonded warehouse, payment being made by letter of credit (or other secure method). Upon payment being made under the letter of credit Gallaher would provide a certificate of release to the warehouse.

Mr Hadkinson would in many instances introduce customers to Mr Tlais, tell him that Gallaher had approved them and wanted him to supply them, and ask him to release the goods to the customer. According to Mr Tlais Mr Hadkinson controlled 75- 80% of sales. Mr Tlais took responsibility for selling to the end customer predominantly in Latin America, Syria and Lebanon.

In 1999 and 2000 Mr Jack dealt with Michael Clarke and Fadi Nammour at Namelex. He was unaware of Mr Hadkinson’s involvement in Namelex until October/November 2001 and only became involved in substantive discussions with Mr Tlais in March 2002.

During the Namelex era the Tlais family purchased about 300,000 cases from Gallaher at a cost of somewhere around $ 30,000,000, payment being made by letters of credit opened against security provided by the Tlais family. In effect the Tlais family was providing the finance for the purchase of consignments ex warehouse Cyprus/Dubai as arranged by Mr Hadkinson. Although the majority of Namelex orders were financed in this way, 80,000 cases were sold in a similar way to a Cypriot company called CT Tobacco (see paragraphs 122ff below) and there were also some Namelex sales to several smaller purchasers.

The commission and free goods arrangements continued during the Namelex era. Highstreet would open a letter of credit at one price, which Gallaher would receive. Gallaher would either pay a rebate or provide goods to some person or company nominated by Mr Hadkinson.

On 28^th August 2000 the Greek customs authorities detained the vessel “Marina” off the coast of Crete and discovered on board substantial quantities of Sovereign and Mayfair which had been sold by Gallaher to Namelex. The cigarettes had been shipped from Cyprus to Port Said in 40’ containers and then unloaded and re-loaded into 20’ containers, apparently destined for Almaty in Kazakhstan. The goods were in the name of CT Tobacco Ltd (“CT Tobacco”). CT Tobacco was a company owned or controlled by Mr Christos Tornarides (“Mr Tornarides”).

Mr Tornarides was known in the industry to have worked closely and extensively with Imperial Tobacco (“IT”) in the transit business, mainly acquiring cigarettes through Frema Tobacco International (“Frema”), IT’s major Cyprus distributor. The Greek authorities reported that the companies that had taken ownership of the products included Highstreet, Tlasco, and CT Tobacco. Mr Hadkinson had introduced CT Tobacco to Mr Tlais and Mr Tlais had been persuaded by Mr Hadkinson that it was safe to supply the Sovereign Classic cigarettes to CT Tobacco despite Mr Tlais’ concerns about credit risk and the risk of product diversion.

In about June or July 2000 Mr Jack had raised with Mr Clarke the possibility of Mr Jack meeting Mr Tornarides with a view to CT Tobacco taking Gallaher brands. Mr Jack was keen to increase sales volumes, not least because he received increased remuneration from Gallaher for doing so. Mr Clarke met with Mr Tornarides and told him that Gallaher was keen to increase the volumes it sold internationally. Mr Tornarides expressed interest and suggested that he could distribute large volumes. Mr Tornarides was keen to do business with Gallaher directly because he thought that that would assist his proposed float of CT Tobacco on the Cyprus Stock Exchange.

In a statement dated 10^th May 2002 made for the purpose of criminal proceedings against a company in the Isle of Man related to CT Tobacco Mr Jack recorded that in the first half of 2000 he had been told by Mr Clarke that Namelex had supplied Gallaher cigarettes to CT Tobacco for sale in East European markets during spring and summer of 2000, and that he understood from Mr Clarke that the destination of these products was in the Balkans. He also recorded that he was approached by Mr Clarke in around July 2000 and told by Mr Clarke that CT Tobacco had shown Mr Clarke an import licence for Albania specifying a quantity of 10 billion cigarettes and had “raised to them a draft distribution agreement for the territory”. Pursuant to that licence Gallaher was asked to accept a Letter of Credit directly from CT Tobacco in respect of a large transaction (780 million sticks) in order to initiate business in the territory. Mr Jack was assured that exclusive import arrangements would secure a high market share and thus justify the volume and that the cigarettes were intended for Albania.

Mr Clarke’s evidence was that he did not say that CT Tobacco had shown him an import licence and Mr Jack could not have thought that he had done so since no licence was granted until January 2001. The disclosed documents include a licence covering 10 billion cigarettes with a January 2001 date.

But a letter of 29^th November 2001 from Namelex to Gallaher, signed in Mr Clarke’s name, records that

“With regards to CT Tobacco they were only supplied originally once we had received assurances that the product would be sold in the territories of Yugoslavia and Albania and after we had been shown a copy of an import license for these territories”

Since the original supply by Namelex to CT Tobacco had been in the spring or summer of 2000 it is likely that Mr Jack’s statement was correct. Even so, 65,000 cases of Sovereign, which was what Gallaher supplied, was a large consignment for Albania, where Sovereign was not in demand.

When, on his return from his August 2000 holiday, Mr Jack learned of the seizure of cigarettes on the Marina he was assured by Mr Clarke that the seizure had been made in error and that the cigarettes were part of a shipment to the CIS markets where Gallaher was unrepresented. This is what Mr Tornarides had told Mr Clarke.

By September agreement had already been reached in principle that CT Tobacco would buy from Gallaher 65,000 cases of Sovereign Classic worth about $ 7 million. According to the evidence of Mr Clarke, which I accept, Mr Jack told him, when they discussed the risk of diversion in the light of Mr Tornarides’ reputation, that senior members of the board, including Mr Northbridge, were very pleased with the deal which should proceed immediately.

The report of the “Marina” seizure reached Gallaher in early September before CT Tobacco had opened any letter of credit in favour of Gallaher. Mr Jack made some investigations in Cyprus. He was told by Mr Clarke that the sale to CT Tobacco was a legitimate sale to an upstanding Cypriot citizen. On 29^th September 2000 he reported to Gallaher that Mr Tornarides was the son of a former Attorney General of Cyprus; and that he would be challenging the seizure. He referred to Press reports of senior Customs sources saying that he was known to them as a local business man of standing. CT Tobacco was in the course of building a cigarette factory in the Larnaca duty free zone. Following this Mr Jack decided to supply the 65,000 cases to CT Tobacco against a letter of credit which was opened in October 2000.

The letter of credit to be opened by CT Tobacco was to be for $ 6,955,000 ($ 107 per case). But Gallaher was to rebate $ 3,055,000, which was to be used (i) to make a number of “marketing allowances” to Fadi Nammour, H & R Distribution, Namelex, and others; (ii) to provide free goods to CT Tobacco (13,000 cases) and Highstreet (1,250 cases in discharge of payments owing to Highstreet by Namelex) and (iii) a $ 1,000,000 payment to the opening bank. The goods were released to CT Tobacco on 31^st October. All the cigarettes had global English health warnings.

The “Marina” incident was the first instance of what appeared to be large scale smuggling of Gallaher’s brands. It caused Gallaher‘s Board to take a more detailed interest in Mr Jack’s trading business. In September Mr Northridge and Mr Simon decided to withdraw Gallaher’s more expensive brands from non-EU export in order to minimise the risk of their being illegally supplied to the UK.

The “Marina” seizure also attracted the attention of HMCE. A meeting took place on 15^th December 2000 between HMCE (Messrs Clive Oldham, John Wales, and Greg Marcanik) and Gallaher (Mr Jeff Jeffery, the corporate affairs manager of Gallaher Ltd, and from March 2002 Gallaher Group Plc). Mr Oldham asked what steps Gallaher had taken to ensure that its customers traded securely. Mr Jeffery’s response was that the pack swap survey showed that very little Namelex stock was smuggled into the UK but he would find out if there were any special measures. Mr Oldham also asked how Gallaher could satisfy HMCE that its major customers were not acting illegally; how it ensured that it knew where its products were sold; and whether it had asked Namelex who it traded with. Mr Jeffery is recorded as saying that he believed that Namelex was the sole distributor in the non-EU markets for the relevant brands, so identifying its major customers was not an issue. He would find out the relevant information and respond. It is clear from Mr Byrne’s evidence that these responses were regarded by HMCE as inadequate.

On 23^rd January 2001 Mr Jeffery wrote a lengthy reply. He referred to the appointment of NTA as distributor in territories in the Middle East, Eastern Europe and Africa; and enclosed details of Gallaher’s sales with the exception of UK & Eire, Kazakhstan and Liggett-Ducat sales. He referred to the September 1999 decision that there should, with limited exceptions, be no future production for export of cigarettes in packs with UK health warnings. He also recorded that since September 2000 Gallaher had taken steps to ensure that packets manufactured for general export outside Europe were distinguishable from those on sale in the UK. He referred to the provisions of the Namelex agreement requiring Namelex to comply with all laws and regulations applicable to the importation and sale of cigarettes.

On 9^th February 2001 Mr Oldham replied expressing the view that the Namelex issue had not been resolved satisfactorily and that the letter of 23^rd January 2001:

“does not answer the fundamental question of how so much Namelex product came to be discovered in suspicious circumstances on the Marina and intercepted by our anti-smuggling staff, and how Gallaher could satisfy both Customs and Excise and themselves that Namelex (or their customers) were not selling to smugglers”

On 20th February 2001 Mr Jeffery replied saying that his knowledge was solely derived from the Greek Customs, that he understood that the cigarettes were being held by Customs in Crete and that all the case details were with the judge. He said that, as a result of press comment (Footnote: ⁹) relating to the believed owner of the cigarettes on the “Marina”, and Customs’ own observations, Gallaher would not in future trade directly with CT Tobacco or Mr Tornarides until the situation was clarified; and that, following discussions with Namelex, Gallaher required those to whom it sold in Cyprus, including Namelex, not to sell Gallaher products to them. (Mr Jack had told Mr Clarke of this decision on a visit to Cyprus earlier in the year). He said that:

“Gallaher has, in the past, repeatedly made it clear to Namelex that it would not countenance the sale of any of its products to smugglers. We have provided a copy of the relevant part of your latest letter to Namelex and taken the opportunity to, once again, restate our position so that there can be no doubt as to our attitude.”

Mr Jeffery referred to discussions with Namelex but omitted to mention that, as Mr Jack had recorded in a memorandum to him of 16^th February 2001, Namelex had approached Mr Jack and expressed concerns about continuing to supply CT Tobacco as a result of which Gallaher had agreed to accept no further orders from CT. Namelex had repurchased such goods as remained in the CT warehouse. TEL complains with some justification that this was so far as Namelex was concerned, an underplaying of their position.

According to Mr Tlais, Namelex did not inform him of HMCE’s concerns; and he did not learn of Gallaher’s instructions to Namelex until March 2002. On the contrary Mr Hadkinson told him to continue selling to CT Tobacco. He told Gallaher that he stopped providing goods in about March 2001 (see his letter of 31^st May 2002 referred to at paragraph 302 below).

In 2001 Namelex expressed interest in CT Tobacco’s plans to build a new factory in the Larnaca free zone, about which Mr Jack had on 15^th January 2001 expressed hesitation. In April Mr Jack indicated to Messrs Clarke and Nammour that, although the Cyprus factory was a very interesting opportunity, Gallaher would not be involved in any project to which Mr Tornarides or CT Tobacco was a party.

It is clear that in March/April 2001 Tlasco Trading was still dealing with CT Tobacco: see a delivery note of 2^nd April 2001 and an invoice of 12^th March, which was signed by Mr Nammour and copied to Mr Tlais. But the Statement of Account between CT Tobacco and Tlais Trading, prepared by Mr Nammour, shows product being released down to August 2001. This account was sent by Mr Hadkinson to Mr Tornarides on 4^th December 2001 and to Mr Tlais on 7^th December 2001 and was said to specify “the amount owed to us”. It was, as Mr Tlais confirmed, sent to Mr Tlais in order for Mr Tlais to check it, as he did.

I infer from that that Mr Tlais was content to allow Mr Hadkinson to continue to arrange for goods financed by the Tlais family to be sold to CT Tobacco until well into 2001 - despite the fact that CT Tobacco was known to be in the transit business, had a reputation for smuggling IT cigarettes, and despite the “Marina” seizure.

Mr Tlais’ evidence, which in relation to the statement of account was not always coherent, was that Mr Hadkinson was selling goods to CT Tobacco, including goods financed by Highstreet, in order to assist Mr Tornarides with floating CT Tobacco on the stock market (Footnote: ¹⁰), against Mr Hadkinson’s oral guarantee that Mr Tornarides would pay Highstreet. In his letter of 31^st May 2002 (see paragraph 302 below) Mr Tlais referred to the possibility that further supplies in addition to the 500 million to which he referred “advanced by my partners from my stocks may also have been sold to [CT Tobacco] without my knowledge”.

I do not accept that goods which the Tlais family had financed were being released to CT Tobacco without Mr Tlais’ knowledge. He himself accepted that the release of goods may have been effected by him on Mr Hadkinson’s instructions. The account that was provided to him gave particulars in great detail of what had occurred. It is unlikely to have included details of goods whose purchase had not been financed by the Tlais family. I say that both because of the title of the account and because Mr Hadkinson’s letter of 7^th December 2001 contains no indication that that is so. The letter states the amount due to “us” as being the $ 5,097,886.97 specified in the account, sets out two proposals as to how that amount (described in each proposal as “Amount owing to Tlasco”) shall be satisfied (involving the return of goods and a payment by CT Tobacco), each of which proposals involves a discount being given on the debt, and refers to Mr Hadkinson’s responsibility for securing cover for the shortfall.

In February 2006 Mr Tornarides and Mr Tlais, amongst others, were convicted in Thessaloniki in Greece of smuggling related crimes committed during the Namelex era.

In late 2000 Namelex reported that large quantities of the cigarettes supplied to it (Dorchester, Sovereign and Stateline) were spotted and stained. “Spotting” to the tobacco industry means the discolouration of cigarette paper which, under certain conditions, occurs when the moisture in the tobacco leaches into the cigarette paper giving it a slightly mottled or “spotted” effect. The problem, if not the solution, is well known to cigarette manufacturers. It is particularly likely to arise if cigarettes are stored at high temperatures or in poor conditions for prolonged periods. It does not necessarily affect the taste of the tobacco but it can put the consumer off.

Namelex suggested that the problem lay in Gallaher’s inexperience in selling goods internationally, particularly in hot climates, and the use of paper outers. It claimed to have suffered huge losses and wanted financial help. Its customers complained (whether justifiably in all cases was, as Mr Clarke recognized, unclear), refused to make payment, and expected more favourable credit terms.

Namelex attempted to recover the offending stock from the market. It reportedly recovered in all about 250,000 cases (see Mr Hadkinson’s letter of 10^th September 2001) and sold some of it at a loss, in markets in which it did not operate, to mitigate its losses. It also extended further credit to many of its customers and provided additional free goods. It presented this to its customers as a fully funded Gallaher initiative: see Mr Jack’s memorandum of 5^th September 2001.

Namelex explained the position to Gallaher. It indicated that it would not be seeking compensation because, so it said, of the difficulties involved in assessing the scale of the problem, which would require going through all the stock in the field, potentially involving large scale stock uplifts, and compensation for duty paid. Namelex suggested to Gallaher that it should be allowed to purchase goods already produced for it on extended credit, so that it would not have to pay until 30^th June 2001. The plan – as explained by Mr Jack to Mr Mark Rolfe, Gallaher’s Group Finance Director - was that Namelex would sell the spotted goods through contacts of theirs and obtain payment for them by the time that the credit expired, and in the meantime would order fresh goods on normal terms to supply existing markets. Mr Rolfe, together with Ms Jones, Mr Simon and Mr Northbridge, approved this proposal and agreed to extend credit up to $ 10 million.

In December 2000 Messrs Northridge, Fielden and Jack of Gallaher met Mr Clarke and Mr Reynolds in London at a dinner suggested by Namelex. Mr Clarke stressed that Namelex was not involved in smuggling and that whatever CT Tobacco had been doing, it was not with Namelex’s encouragement or support. On 11^th December 2000, following the dinner, Mr Jack confirmed to Mr Reynolds that Gallaher would agree to release to a company called European Consolidated goods to the value of $ 9,765,981, totalling 132,744 cases, most of which were then in either Cyprus or Dubai, such sum to be repaid by 30^th June 2001. By a letter of 12^th December 2000 Mr Reynolds confirmed that payment would be made by that date.

On 13^th December 2000 Mr Nammour wrote on behalf of Namelex indicating that the company which would be responsible for the repayment was to be JL Spirits & Tobacco Ltd (“JL Spirits”), as Quickbeam Enterprises Ltd had become. He also asked for about 23,000 cases to be released to Highstreet. JL Spirits was a company owned or controlled by Mr Hadkinson, Mr Nammour, and Mr Jim Livie, a former Gallaher employee.

There is some doubt about the extent to which goods supplied to Namelex were in fact spotted. In June 2001, Mr Jack wrote to Mr Reynolds that “the problem was more of perception than reality”. Mr Keevil, Gallaher’s Senior and later General Counsel, was told by Mr Tlais in April 2002 that Mr Tlais had never raised any issue of spotting with Mr Hadkinson. Mr Tlais expressed the view that Mr Hadkinson had been intending to perpetrate a fraud on Gallaher and him from the outset.

Cooperation continued between Gallaher and HMCE during 2001 – to such an extent that HMCE came to regard Gallaher as the most cooperative of tobacco manufacturers.

At a meeting with Customs personnel (Clive Oldham, Paul West and Greg Marcanik) on 22^nd February 2001 HMCE repeated its concerns about Namelex and asked for information about the ownership of cigarettes on the “Marina”. Mr Jeffery said that he had learnt from the Greek Customs that the chain of ownership was Bank du Liban, Namelex, Highstreet, Tlasco, and CT Tobacco. Mr Jeffery asked for Mr Oldham’s assistance in finding out who was being prosecuted in Greece, as the information could be useful in ensuring that Gallaher’s products were sold legitimately. Mr Oldham seemed satisfied with Gallaher’s actions in relation to CT Tobacco.

On 7^th March 2001 Mr Jeffery wrote to Mr Oldham, answering a number of questions that HMCE had raised. He stated that Gallaher had no knowledge of Namelex’s agreements with its customers, to which Gallaher did not have access because of Namelex’s concerns that this would put Gallaher in an advantageous bargaining position; but that Namelex had indicated a willingness to discuss with HMCE its questions about Namelex’s customers. He also said that Gallaher would make further inquiries of Namelex about its customers and the territories in which they operated and what steps it could take to enhance its ability to trace Gallaher products sold to its distributors.

Mr Jeffery enclosed with his letter a copy of Gallaher’s Policy on International Trade (the “ITP”). The ITP had been developed in early 2001, primarily by Mr Keevil and Mr Fielden, but with input from Mr Jeffery, as a formalisation of Gallaher’s existing policy on international trade, namely to build business in legitimate duty paid markets.

The ITP set out Gallaher’s approach (“Gallaher deplores smuggling”), and the steps which Gallaher had taken of its own initiative to try to ensure that Gallaher products were not smuggled back into the UK. It set out that its policy “moving forward will be to require all customers seeking to purchase Gallaher’s products manufactured for international markets outside Europe, to confirm that they have read this policy and will abide by its terms”, and made clear that goods had to be destined only for duty-paid domestic markets or legitimate duty free outlets.

Mr Jeffery circulated his 7^th March 2001 letter to HMCE to Messrs Northridge, Simon, Fielden, Birks, Keevil, Jack, Tardif and Jones, within Gallaher, to ensure that all management involved in international trade were aware of their obligations, and those of their customers. On 9^th March 2001 Messrs Birks and Jeffery had a meeting with Mr Byrne and Mr Wells of HMCE. Mr Birks explained that Gallaher would provide the ITP or relevant parts of it to every employee involved in international sales and to each distributor outside the EU.

On 26^th March 2001 the ITP was formally adopted by the board of Gallaher Ltd.

Gallaher gave HMCE Mr Nammour’s telephone number and encouraged Mr Clarke to contact them. On 10^th May 2001 Mr Oldham wrote to Mr Nammour proposing a meeting. In May or early June 2001 Mr Clarke came to Gallaher’s premises in Weybridge where he met Mr Jack and, for about half an hour, Mr Keevil. Mr Clarke appeared to be willing to meet HMCE but said that all his energy was being devoted to sorting out the debt owed to Gallaher. Mr Keevil asked for more details about Namelex’s customers but Mr Clarke expressed unwillingness to provide commercially sensitive information and said that he feared that Gallaher might cut Namelex out and deal with the customers themselves. Mr Keevil also asked about using more local language health warnings but was told that, because English health warnings had more cachet in the markets, local health warnings would not be used unless required by law.

On 5^th July 2001 Mr Clarke signed a letter on behalf of Namelex agreeing that it would use its best endeavours to abide by the terms of the ITP.

Two part payments were made in respect of the $ 9.7 million credit due on 30^th June 2001, reducing the debt to about $ 8.9 million. Apart from those the debt was not paid, despite Mr Clarke earlier guaranteeing to pay a sum on account before that date and later stating that the payment would be made on time. The failure of either Namelex or JL Spirits to pay the amount due was a matter of increasing concern to Gallaher, not least because it could, and eventually did, mean that Gallaher would have to write the debt off.

Namelex blamed the non payment on a failure to complete a Russian transaction which would have produced the necessary cash. Mr Clarke understood that Mr Hadkinson was working on a Russian government related transaction which would provide the finance.

In late June or early July Mr Hadkinson had begun trying to make some financial arrangements which were to involve letters of credit in favour of Gallaher, one from Sobibank, a Russian bank, and one from Banque de la Mediteranée, a Lebanese bank with which Mr Nammour was associated. The plan was to raise finance through one or other of these letters of credit, and to use goods obtained pursuant to the letter of credit to supply Mr Tlais with free stock, as a result of which he would begin to open letters of credit again.

In early July Mr Simon and Mr Jack travelled to Cyprus in July and met Messrs Clarke and Nammour. On 6^th July Mr Clarke wrote to Mr Jack saying that Namelex was moving rapidly towards finalising a letter of credit which he was confident would be closed in a week. Over the course of the summer Namelex produced regular updates promising imminent payment and proposals involved increasingly bizarre payment mechanisms.

On 28^th August 2001 Mr Clarke provided Gallaher with a letter from Sobibank to Namelex indicating that a documentary credit for $ 30 million had been approved, the requisite collateral having been provided, and that the necessary permission from the Central Bank would soon be issued. A Russian speaking secretary at Gallaher contacted the bank who denied that the letter came from it. On Saturday 1^st September Mr Jack and Mr Redshaw of Gallaher met Mr Clarke in Cyprus to confront Mr Clarke with their belief that the letter was a forgery. He was visibly shocked. Mr Nammour, to whom Mr Clarke referred the matter, expressed disbelief. Mr Jack and Mr Redshaw took these reactions to be genuine.

Mr Jack was given to understand by Namelex that the Chief Executive of Sobibank had given his confirmation that the transaction was in hand “privately”, since the transaction as a whole would have breached Russian banking regulations because funds were to be moved off shore to allow the issuance of a letter of credit from a bank in which Gallaher could have confidence; and that the signatory of the letter would confirm it at a face to face meeting. He was also told that, when Gallaher sought verification, the matter was referred to the Bank’s Internal Security Officer as a result of which a Central Bank investigation was launched into the affair and the bank was denying the letter.

On Monday 3^rd September 2001 Mr Nammour met with Sobibank’s lawyers in Cyprus and was told that there was “a last minute problem”. Mr Jack appears to have been told (see his memo of 5^th September 2001) that Gallaher’s request for verification of the letter from Sobibank “had caused some difficulty with the bank”; and that the bank director stated that this would not delay the issuance of the LC “but would cause subsequent difficulties for senior officers and shareholders of the bank”. On 4^th September Sobibank confirmed to Gallaher by e-mail that they had never issued letters of any kind about financing Namelex and had never had Namelex as a client.

In September 2001 Mr Perks, the head of Gallaher’s Group Risk Assurance (“GRA”) Division, which included Gallaher’s internal audit department, went, at Mr Rolfe’s request, to audit the Gallaher stock in Cyprus. He found that the main Attheslis storage facility was reasonably secure. But the result of the physical stock count there revealed 498 million sticks less stock than what appeared in Gallaher’s books, which may have been attributable to exchanges of stock authorised by Mr Jack, as a result of which some of the returned stock could be in Dubai (where there was an excess of 441 million sticks).

He also found that there were three subcontracted facilities two of which were little more than unmanned lock ups. The third facility and one of the lock ups held significant quantities of Gallaher brands apparently owned by Namelex or CT Tobacco. The amount of stock in Cyprus belonging to Gallaher or Namelex and its customers did not appear consistent with the impression given by Namelex that stocks were moving out regularly. As a result arrangements were made to return to the UK some containers that had just arrived in Cyprus and others that were in transit. This caused Mr Clarke to claim that it would seriously affect Namelex’s ability to raise the relevant funding.

On 10^th September 2001 Mr Clarke and Mr Nammour wrote, on JL Spirits’ notepaper, a long letter to Mr Northridge, outlining how much Namelex had expended in the purchase of cigarettes (said to be c $ 73 million for over 767,000 cases), and what its “exposure” was in the form of trade debtors and goods supplied or to be supplied free of charge, stocks in the market, and letters of credit opened for goods only partially delivered ($ 80.5. million). He outlined a number of problems (e.g. initial supplies of Mayfair, Sovereign Black and Dorchester Black in UK domestic packs at high prices, which had to be sold at a loss, and the risk of it being illegally shipped back to the UK; spotting problems, shipment delays; hard outers not supplied until late 2000, no soft packs until recently, etc).

The letter referred to the $ 30 million letter of credit organised by Namelex and accused Gallaher of taking the “unethical” step of releasing “confidential and privileged” documents which had caused “our Russian partners” to withdraw their support at a time when the letter of credit was ready to be issued. The letter expressed the hope of resolving the matter by the end of September 2001.

On 27^th September Mr Clarke passed on to Mr Jack a message from some contact of Mr Hadkinson in Russia that the letter of credit would be issued within the week, the delay being allegedly due to the events of 9/11.

HMCE had in place a red and yellow card procedure. This was the means by which it alerted manufacturers in respect of customers about whom it had serious concerns, usually based on the proportion of the customer’s total purchases which found their way back to the United Kingdom. In the case of a red card HMCE invited the manufacturer to consider taking action against the customer. The range of action to be considered was: cessation of supply; reduction of supply; restrictions on certain brands; delivery of product direct to intended markets; ending the practice of delivering to free ports; a review of export policy; contractual provisions regarding the behaviour of the distributors in relation to the destination of their products; conducting an audit of the distributors; and agreeing a system for tracing sales. A customer the subject of a yellow card would be one about whom HMCE had some concerns and about which it would expect the manufacturer to make further inquiries. That was the way in which the procedure was explained to Gallaher in a letter from HMCE of 1^st October 2001 which used the red and yellow card terminology.

The footballing metaphor was not entirely apt. It was not an expression that Mr Byrne used. HMCE had no power to order or require a manufacturer to do anything, or to penalise it for not having done so.

On 1^st October 2001 Mr McCallum of HMCE wrote to Mr Jeffery informing him that they were issuing a red card against Namelex, stating that he was sure that as a responsible company Gallaher would want to comply with the system and take “robust” action against its distributors who were shown to be contributing to the tobacco smuggling problem.

The basis upon which HMCE issued the red card was primarily the volume of seizures of products sold to Namelex. Between August 2000 and August 2001 HMCE had seized about 100 million Sovereign cigarettes out of a total of about 2.5 billion supplied to Namelex. If a multiplier of seven were to be applied (see paragraphs 12-14 above) it would imply that nearly a quarter of the cigarettes sold to Namelex had been smuggled. The 100 million figure did not include the 100 million seized on the “Marina”.

The red card was, not surprisingly the subject of considerable discussion at Gallaher involving Mr Jeffery, Mr Keevil, Mr Fielden and Mr Rolfe.

On 8^th October 2001 Ligget-Ducat faxed to Mr Fielden of Gallaher documents that it had obtained which detailed arrangements set out in a memorandum signed by Mr Hadkinson whereby an unnamed investor was to open a letter of credit for $ 30 million in favour of Gallaher in return for $ 45 million. The arrangement was to be that Gallaher would agree to provide 450,000 cases of product free of charge within 365 days as security for the payment of that sum, which Mr Hadkinson was to arrange. If and insofar as the investor received cash Gallaher was to be released from its obligation to supply goods free of charge. Gallaher was to have to confirm that NTA would receive a 5 year licensing agreement for Dorchester and Sovereign.

Mr Clarke told Mr Rolfe, who had telephoned him, that he had no knowledge of the documents, although Mr Hadkinson’s memorandum had said that Mr Clarke and Mr Nammour were “on stand by to travel” to sign a General Agreement with the investor. Neither Mr Rolfe nor Mr Fielden had at this stage heard of Mr Hadkinson. Mr Rolfe asked Mr Jack, who had not heard of him in the context of Namelex, to find out about him. Mr Jack learnt from Mr Clarke that Mr Hadkinson had been helping Namelex to find funds.

Further communications took place between Gallaher and Namelex and between Gallaher and HMCE. At a meeting in Weybridge on 15^th October 2001 Mr Rolfe and Mr Jack met Mr Clarke and Mr Nammour. Namelex’s purpose was to obtain further time and to ensure that, if Gallaher was paid, they did not then cut Namelex out. Namelex sought a new 5 year contractual commitment. Namelex proposed to provide a stand by letter of credit in the sum of $ 50 million only to be drawn down after 1 year, out of which they sought a repayment of $ 12 million, together with a renegotiated five year distribution agreement and the lowest possible price levels for a year. Gallaher’s representatives wanted the letter of credit to be discountable or to allow for partial drawdown. Namelex said they would explore the possibility of using the letter of credit to secure a facility which would allow Gallaher to make partial drawdowns. Gallaher was in principle prepared to allow the repayment of $ 12 million and to enter into a 5 year contract at reduced prices for a year.

Mr Rolfe explained HMCE’s concerns and said that, if Gallaher were to continue to do business with Namelex, it would have strictly to comply with the ITP; shipments would have to go direct to local markets; and there would need to be procedures to track goods to the destination market, and pack markings appropriate to those markets. Mr Rolfe explained the need to limit the supply of packs with non-specific health warnings. Mr Clarke and Mr Nammour were, however, keen to continue to have product with a global English health warning, saying that products with an English-language health warning had greater cachet, and that to use anything else would put Gallaher brands at a competitive disadvantage. They also claimed that the smuggling of Sovereign Classic was limited to paper parcel product, and that product in hard outers would not suffer from the same problems. Mr Rolfe told Mr Clarke that Gallaher would negotiate a new agreement in good faith if the debt was paid and finance was made available for future orders.

On 19^th October Mr Rolfe wrote to Mr Nammour referring to the fact that, if Gallaher were to continue doing business with Namelex, there would need to be a new agreement incorporating the ITP. Correspondence over the terms of a new agreement and the proposed arrangements continued in October.

At a meeting with HMCE on 5^th November Mr McCallum explained that the decision to red card Namelex was in part influenced by Mr Clarke’s failure to meet with them and that it was HMCE’s view that manufacturers should stop trading with red-carded customers.

Mr Jeffery reminded HMCE that Gallaher’s export trading strategy outside the EU involved, mainly, Namelex-related companies, and discussed what could be done short of terminating the Namelex Agreement. Mr Jeffery set out the actions which Gallaher had decided to take: ensuring that Gallaher had prior notification of the final destination market of all goods; shipping the goods directly to their final destination market; identifying the supply chain; introducing a system for tracking sales of cigarettes into their final markets, using pack codes to identify destination markets and first customers; and ensuring health warnings were appropriate to the destination markets. In part, these changes were necessitated by Italian legislation of April 2001 which required tobacco manufacturers to adopt a coding system to record certain information on a cigarette packet, including intended final destination and first customer. HMCE was comfortable with the range of measures Gallaher was putting in place.

On 22^nd November 2001 Mr Jack informed Mr Clarke of the red-carding of Namelex. He pointed out that a red card normally meant that “We should cease to trade” but that as a result of demonstrating that the goods seized were in the main supplied to CT Tobacco either by Namelex or Gallaher itself, he had secured “our continuing business”. He stressed the importance of Gallaher’s goods not finding their way back to Europe and that there should be no dealings with Mr Tornarides or CT Tobacco whatsoever. He also said that it was in the mutual interest of Gallaher and Namelex that Mr Clarke should give a full response to HMCE’s questions, which could be expected at the meeting with Mr Clarke that was shortly to take place, about the volume of product supplied to CT Tobacco and bought back.

Mr Clarke’s evidence is that in November 2001 he travelled to Weybridge and met Messrs Keevil, Jeffrey and Jack of Gallaher. He explained what he knew about a deception in relation to free goods (see paragraphs 194ff below) that was being practised on Mr Tlais and that as far as he was aware Mr Tlais had no idea what Mr Hadkinson was doing and was a victim of the situation. Gallaher wanted to buy further time to consider its options and asked him to provide them with further information about the promised letters of credit. After this point he acted as an informant to Gallaher, keeping them abreast of the prospects of success of Mr Hadkinson’s financing plans.

Both Mr Keevil and Mr Jeffery deny that any such meeting took place. Although Mr Clarke’s evidence is consistent with Mr Jack’s statement to HMCE in June 2002 that he did not know of Mr Hadkinson’s involvement with the Namelex business until October/November 2001, I prefer their evidence to that of Mr Clarke. Their evidence struck me as convincing. Moreover there is no reference to any such meeting in Gallaher’s documentation (or any documents produced by TEL).. This seems to me an unlikely omission if Mr Clarke had made a special journey to Weybridge. If Mr Clarke had begun to tell a meeting including Mr Keevil about Gallaher being implicated in a fraud being perpetrated against Mr Tlais it seems to me improbable that neither Mr Keevil nor Mr Jeffery would have made any note of it, recalled it, or done anything about it. Mr Keevil’s evidence, which I accept, was that he would immediately have contacted Mr Fielden and Mr Perks and advised the suspension of Mr Jack. He did none of these things.

Mr Clarke met with HMCE in January 2002. He used the opportunity to discuss how HMCE would feel if Namelex dealt with Imperial Tobacco. His evidence was that he did not feel he could be completely open about the Sovereign brand, his true view being that Gallaher’s irresponsible volume selling of stock into a transit market with global health warnings made it responsible for the seizures that occurred. As a result, so he believed (correctly) HMCE regarded him as evasive.

Further promises about forthcoming letters of credit were made. No letter of credit came forward and on 30^th January 2002, following a high level Gallaher meeting, Namelex was given a deadline for payment of 21^st February. That deadline was influenced by the fact that 6^th March was the date for the announcement of Gallaher’s financial results.

On 20^th February 2002 a meeting took place at Weybridge attended by Mr Hadkinson and Mr Clarke. Mr Hadkinson said that he had secured a letter of credit for $ 52 million from a merchant bank, the terms of which (involving various payments to Highstreet, Hadkinson and Switzerland) were set out in a letter of the following day. The letter of credit was intended (by Mr Hadkinson) to be confirmed by Deutsche Bank. Mr Rolfe raised with Namelex the possibility of a direct approach by Gallaher to Mr Tlais as a means of mitigating losses. Both Mr Hadkinson and Mr Clarke expressed concern about this, indicating that Mr Tlais was a highly volatile individual and difficult to deal with.

No letter of credit or other payment was forthcoming by the deadline (not least because Barclays Bank refused to undertake to pay $ 13 million out of the $ 52 million to a company called Necos Ltd). Gallaher was, therefore, forced to announce an exceptional loss of around £ 12.3 million in its 2001 results to reflect (a) the unpaid debt from JL Spirits & Tobacco and (ii) the stock produced for Namelex which was sitting in Cyprus and Dubai.

On 23^rd April 2002 Gallaher and HMCE entered into a Memorandum of Understanding (the “MOU”). The purpose of the MOU, first mooted in September 2001, was “to set the framework of co-operation between HMCE and the particular tobacco manufacturer in order to minimise any obstacles to legitimate trade while minimising the smuggling of exported UK manufactures cigarettes back in to the UK”.

The MOU recorded the existence of the ITP and stated that Gallaher only supplied product where there was a legitimate demand for the product in the intended final market; took action to identify supply routes where information indicated substantial smuggling of Gallaher’s products; refused sales where the end-sale destination was in doubt; revisited its trading relationship with any distributor shown, or reasonably believed, to be behaving improperly and would terminate it immediately if it concluded that any distributor was a smuggler or was knowingly or recklessly supplying one; and that Gallaher provided HMCE with all relevant information about the destination of export sales and export sales data, including pack coding data.

This MOU was the first of its kind. It was publicly announced by HMCE who recognised that Gallaher had been at the forefront of cooperation by tobacco manufacturers. Gallaher was eager to benefit from this public approval.

As appears from paragraph 92 above Mr Hadkinson encouraged Mr Tlais to offer cigarettes to other distributors at significant discounts, by representing that Gallaher had agreed to provide free goods via himself/Namelex in order to compensate Mr Tlais for his losses. It was in Mr Hadkinson’s interest to get Mr Tlais to sell as much as possible, since he or his companies or associates would earn “marketing allowances” on sales financed by Mr Tlais.

Whilst Gallaher provided a substantial quantity of free goods to Namelex, in anticipation that this benefit would be passed on in whole or in part to sub-distributors, it had made no agreement with Mr Tlais or his companies for the supply of free goods by Gallaher to them.

That Mr Hadkinson was deceiving Mr Tlais in this way was known to Mr Clarke. His evidence was that, although he knew that Mr Hadkinson was saying that Gallaher would provide free goods, and that that was false, he thought that Mr Hadkinson intended to make sure Mr Tlais received the goods promised. If that is what he thought, he engaged in a high degree of wishful thinking; particularly if he was – as he told me - prevented by Mr Hadkinson from speaking directly to Mr Tlais on the supposed ground that Mr Tlais disliked dealing with English people – which is, and must have been realised by him to be, untrue.

Mr Clarke told me, and I accept that he was not aware quite how much Mr Hadkinson had promised Mr Tlais by way of free goods. In about October 2000 he saw the free goods account between Namelex and Highstreet (which he was only rarely allowed to see) and it then stood at 42,469 cases. Mr Clarke suggested that Namelex should take steps to reduce that liability and not long afterwards a number of cases were provided to Mr Tlais free of charge. An FOC Stock Report of 13^th December 2000, supplied by Mr Hadkinson to Mr Tlais, shows 42,469 cases being due (19,185 cases having been released previously), which Namelex had instructed Gallaher to release. These were part of a consignment to JL Spirits supplied on extended credit terms.

The next time that Mr Clarke saw the free goods account was in about August 2001 when it stood at around 300,000 cases, with a value of some $ 30 million. This was to him an unbelievable figure, representing something close to one free case for every case ordered during the Namelex era. Mr Tlais had agreed with Mr Hadkinson that, once he received $ 30 million of free goods, he would open a $ 30 million letter of credit. Mr Clarke told Mr Jack what he had found, and his belief that Mr Hadkinson was trying to defraud Gallaher. Mr Jack was deeply concerned and feared that, if Namelex collapsed, and Gallaher’s business in the Middle East with it, he would be out of a job.

At about this time Mr Tlais was becoming increasingly concerned about whether and when Gallaher would supply the free goods he believed that Gallaher was due to be making available to him. He contacted Messrs Clarke, Nammour and Hadkinson regularly to enquire on progress, making it clear that he would not open the $ 30 million credit promised unless he got the goods. At a meeting in late July in Cyprus Mr Clarke told Mr Tlais, on Mr Hadkinson’s instructions, that the free goods would be released in August, although Mr Clarke knew that this was misleading. Mr Hadkinson had told Mr Clarke that he was confident of getting the necessary finance to make this possible. In the event he did not.

At that meeting Mr Tlais handed Mr Jack, whom he had not met since the signing of the Namelex Agreement, a letter on NTA paper signed by him and dated 24^th July 2001. This had been drafted by Mr Hadkinson, who had told him to give it to Mr Jack. That letter included the following passage:

“To date Gallaher have released to us about 257,000 cases free of charge and we can proudly confirm that all this quantity has already been given to our clients and more, to support the continued marketing of Gallaher business and to resolve the problem of the spotted paper outer products.

In fact, we have to-date not only given our clients the 257,000 cases free of charge, but we have committed another 268,000 cases free of charge to this business as further support over the next few months ……

Our commitment to this business is made with confidence since Gallaher has more than demonstrated its commitment to the business and to us by supporting the development of our cooperation with the 257,000 cases already released to us and the 268,000 cases to be released to us once manufactured and shipped as confirmed by Mike.

We would greatly appreciate receiving the release of these free of charge goods as a matter of priority, preferably before the end of August, as confirmed by Mike, in order to assist us recover our heavy investments”

Mr Jack knew that Gallaher had not released 257,000 cases free of charge, although Namelex may have done so (Footnote: ¹¹). He also knew that Gallaher was not intending to release 268,000 cases of free goods to NTA or Mr Tlais. He did not however contradict Mr Tlais’ expressed understanding that Gallaher would be providing 268,000 cases of free goods. 268,000 cases at $ 100 a case, the price Mr Tlais was then paying would produce $ 26.8 million.

Mr Tlais knew that he, at any rate, had not received 257,000 cases free of charge. His evidence was that he had received no free goods except for about 40,000 cases to compensate him for money spent on demurrage, by which I take him to mean storage charges. He said that he believed that the 257,000 cases had been provided to Namelex or other distributors in respect of the spotting problem (Footnote: ¹²).

According to Mr Tlais, Mr Jack took the letter and said that he would read it later and respond, rather as if he already knew what it contained. On 26^th July Mr Jack sent an e-mail to Messrs Simon, Rolfe and Jones at Gallaher which read:

“As I planned, I met with Abu Hameed yesterday who was, as usual, upbeat. While thanking us for our support, he expressed his concerns about our continuing support given his level of investment. He acknowledged that he had been assured of that at all times by Mike and Fadi but had felt the need to see me face to face and to get it from the horses [sic] mouth….Fadi spoke to him privately following our meeting and also felt he was reassured. We hope to see an acceleration of his process now. They are committed to clearing the matter up in the next 2 weeks and I will keep you posted.”

The reference to “his process” was probably to Mr Tlais opening another letter of credit to finance the business.

What exactly Mr Jack said to Mr Tlais is unknown but it appears that he gave him some degree of assurance of Gallaher’s continuing support in the provision of free goods. On 5^th September 2001 Mr Jack sent to Mr Northridge, Mr Simon, Mr Rolfe, Mr Moxon and Ms Jones, the memorandum to which I refer in paragraph 92 above. By this stage, at the latest, Gallaher, and, in particular, Mr Jack and the recipients of the memorandum knew that Namelex had been telling Mr Tlais that Gallaher was investing heavily in the supply of free goods to support Namelex’s clients.

Mr Rolfe’s evidence was that Gallaher considered whether this state of affairs had any negative implications for Gallaher and concluded that it did not on the ground that it was largely a matter of indifference whether the free goods were coming from Gallaher or from Namelex. That would be true if, but only if, the goods kept coming. If they did not it would make a great deal of difference to Mr Tlais whether it was Gallaher or Namelex that had agreed to provide them and, if Gallaher, whether the goods were to be supplied to Namelex or to him. This was particularly so in circumstances where the Namelex group’s ability to honour its obligations was in doubt. If Gallaher did not appreciate this they were shutting their eyes to the obvious.

In a memorandum of 6^th September to the same recipients Mr Jack explained that Mr Tlais was expecting and chasing for a substantial volume of free goods (in respect of which Namelex had made a commitment to Mr Tlais) “to support actions carried out in his markets”, which were to be supplied FOC by Namelex Holdings “from within one of their own funding routes” and that Mr Tlais would open his letter of credit for $ 30 million once he had got them. It was apparent to Gallaher that Mr Tlais would not provide a letter of credit unless and until he got his free goods (Footnote: ¹³).

From September onwards Mr Tlais was regularly calling Mr Hadkinson, pushing him to say when the free goods were going to arrive. In mid September he told Mr Hadkinson that there would be no further funding until he had had free goods or money to their value. Mr Hadkinson said he would speak to Mr Jack at a meeting they were having on 13^th September and ask him to confirm matters in writing.

On 13^th September 2001 Mr Jack wrote the following letter to Mr Tlais:

“Dear Abu Hameed

We wish to confirm to you that Mike and Fadi have presented to us the option of the US$30 million one off payment in full settlement as an alternative option to the free of charge goods.

We are currently studying the various options for the best interests of the business.

Under the current circumstances we need 3-4 weeks to reach a final decision with regards (sic) which option to take, after we have concluded the on-going discussions. The final decision will reflect the conduct of the future business.

Once a decision had been reached we shall immediately inform you of it.

Until then we would appreciate your understanding and support”.

This letter was intended by Mr Jack to keep Mr Tlais at bay by conveying to him that Gallaher intended either to supply him with free goods or their cash equivalent and was deciding which option to take. It was written following a meeting between Messrs Clarke, Hadkinson and Nammour on 13^th September. Messrs Hadkinson and Nammour assured Mr Clarke that a deal had been finalised and a letter of credit was about to be opened but said that they needed time to finalise it and needed Gallaher’s help to keep Mr Tlais at bay. Mr Clarke and Mr Livy then met Mr Jack at the Secret Valley Golf club. Mr Hadkinson had produced several drafts of a letter to be sent to Mr Tlais. These were presented to Mr Jack as options by Mr Clarke and Mr Livy. Mr Jack agreed to sign the version set out in paragraph 208 above, as being the most ambiguous; drove back to Namelex’s office in Larnaca, and retyped it on Mr Nammour’s computer on Gallaher notepaper. Mr Nammour faxed it to Mr Tlais (Footnote: ¹⁴). Mr Jack confirmed to Mr Tlais, when Mr Tlais telephoned, that he was the author.

Mr Jack wrote the letter because he was desperate to ensure that the Namelex debt was repaid because his job was at risk. He believed, optimistically, that Namelex would come up with the finance it was seeking which would enable the JL Spirits debt to Gallaher to be paid off, and free goods to be provided to Mr Tlais, who would then open his letter of credit and business could continue.

The representation as to Gallaher’s intentions contained in the letter was, and was known by Mr Jack, to be untrue. Gallaher had no such intentions. The letter was a deceitful attempt (to which Mr Clarke was a party) to buy time. It was continued by Mr Jack confirming to Mr Tlais in several telephone conversations between September and December that Gallaher was getting ready to pay the money or provide the goods.

On 10^th October 2001 Mr Jack wrote a memorandum for Gallaher’s senior managers including Messrs Rolfe, Saad (head of New Business Development), Simon and Northridge in which he said:

“In assessing the options, the other fact to be cognizant of is that [Namelex’s] customers have not been fully informed of the way in which they have run the business. In particular, their key customer has been given volumes of goods by them in the belief they were supplied by Gallaher and expects further volume to be forthcoming. These goods are also the ones that Namelex expected to pay for and give free themselves.”

The memorandum referred to Namelex having promised Mr Tlais 2.5 billion additional free goods – i.e. 250,000 cases. It envisaged two possible scenarios by which Gallaher would appear to supply the free goods which TEL expected to receive. Under the first scenario Mr Tlais would pay $ 100 per case for the goods which TEL had manufactured for Namelex with the cost of the free goods coming out of Namelex’s margin. In the second Gallaher would deal directly with Mr Tlais and the expected free goods would be provided out of Gallaher’s margin.

The internal Gallaher documentation to which I have referred shows that Gallaher was aware that Mr Tlais had been promised 250,000 cases of free goods to be provided by Gallaher, and that Gallaher was intending to continue the illusion that it was they who were providing them, when in fact it would be Mr Tlais who would be financing the provision. The suggestion in Mr Rolfe’s witness statement that at this stage Gallaher had no reason to believe that the provision of free goods was to be in respect of any previous commitment made to Mr Tlais and was simply an incentive to provide financing against future orders is not borne out by the documents.

Mr Tlais was seeking to arrange an urgent meeting with Mr Jack, who wrote to him on 6^th November claiming, inaccurately, that he had been too busy with other commitments to meet him, and that he was doing all he could to meet at the earliest opportunity. On 21^st December Mr Jack sent another letter expressing a wish to meet early in January 2002. In that letter Mr Jack said that he thought that the terms of a new five year term agreement had been agreed which would “allow us to move forward, releasing the goods and building a mutual business of the size you have indicated”. When Mr Tlais received it he contacted Mr Hadkinson, furious that Mr Jack had made no mention of when the free goods issue would be resolved.

Mr Hadkinson contacted Mr Jack, who wrote to Mr Tlais on the same day as follows:

“I apologise for not being more explicit in my previous note to you this morning but, as I am sure you understand, I have been rushing around in an attempt to get everything organised for our mutual best interest.

In relation to the $ 30m issue, I am advised that the delay is only due to the increased administrative bureaucracy brought about by the recent world events.

We understand if it is not completed before the end of the year it will definitely be finished in early January 2002. In fact, although I myself am scheduled to be on holiday with my family now until 3^rd January, I will come to the office next week to push it through…”

This letter was an embellishment of a draft by Mr Hadkinson. Amongst other changes Mr Jack added the reference to his coming to the office the next week to take personal charge. The letter was intended to confirm to Mr Tlais that Gallaher would see to the provision of the $ 30 million in some shape or form.

On 29^th January 2002 a memorandum of Mr Jack was circulated to senior executives including Mr Northridge, which under the heading “Further Potential Solutions” read:

“I propose to put it to [Namelex] that, if there is any doubt in their mind as to the ability to deliver on time, they should consider the following:

Make a payment to us on account of as large a sum as possible.

We will use half this sum against debt and half to release goods from stock.

These goods will go straight to Abu Hameed as evidence that the flow has started and will be used as leverage to start his direct funded orders, whereupon rebates due within the business can be used to further draw down debt and release further goods to Namelex to discharge their FOC liabilities. This route has the greatest chance of success.

If this is not acceptable, we will approach AH directly and trade with him. This will necessitate telling him the truth about what he has been told by his partners. This position will largely depend on a trade off between his greed for future business and his pride at having been misled. There is, I believe a 50:50 chance he will go for it”.

Had the first course been adopted it would have enabled Namelex to continue the deception by representing that Gallaher was beginning to provide the free of charge goods which Namelex had led Mr Tlais to believe Gallaher was to provide. Gallaher only contemplated telling Mr Tlais the truth as the last option.

Mr Tlais was expecting to receive free goods and was being told by Mr Hadkinson that it was Gallaher which was providing them. It is, however, unclear what was the basis upon which the provision of free goods was to be calculated. Mr Tlais’ evidence was that he would be selling, initially, at a price that was markedly less than what he was paying and that the difference would be made up by the provision of free goods, although no agreement was made as to any value that was to be attributed to the goods supplied free for this purpose. Mr Tlais was, so he understood, to be covered by the provision of cases to make up his losses as decided by Mr Hadkinson and Gallaher. The calculation of the free goods account referred to in paragraph 198 above suggests a figure of around $ 100 a case, which was the price that Mr Tlais was paying in the Namelex era.

Mr Tlais claimed to have lost $ 30 million. No calculations have been produced showing the make-up of this loss. Appendix 2 to Gallaher’s final submission, to which I refer in paragraph 1180 below, contains details of apparent TEL sales figures in respect of the goods the subject of the relevant letters of credit, which show that TEL does not appear to have made a loss overall and certainly not a loss even approaching $ 30 million. This calculation has, however, to be treated with caution because the TEL sales figures are derived from the customer accounts which may well in some cases not represent the actual prices achieved.

By 21^st February 2002 both Gallaher and Mr Tlais had serious problems. Gallaher had $ 8.7 million due and unpaid, the debt being owed by JL Spirits, which was unable to pay. Gallaher had a large quantity of stock on its hands – in Cyprus, Dubai and the UK - ordered by Namelex or JL Spirits. It knew that Mr Tlais, the major financier of letters of credit for goods ordered by Namelex, was expecting $ 30 million worth of free goods or cash in lieu.

Mr Hadkinson was also threatening to bring a claim against Gallaher if it terminated the Namelex Agreement. In a letter of 25^th February 2002, in which he referred to a proposal for a $ 32 million irrevocable (but as yet unconfirmed) letter of credit he had said:

“A negative view from Gallaher will result in an unthinkable chain reaction of claims and counter claims resulting in a legal nightmare for all of us”

Mr Tlais, for his part, had invested large sums in financing the purchase of cigarettes. He claimed to have suffered great losses and that the promises Mr Hadkinson had made to him about free goods had not been fulfilled. He had a sizeable quantity of goods on his hands which he had not sold. The collapse of Namelex threatened to bring his prospects as a major distributor of Gallaher’s products to an end.

On 4^th March 2002 a high level meeting took place at Weybridge. Messrs Northridge, Rolfe, Keevil, Saad, Moxon and Jack attended. The meeting considered a paper from Mr Jack which proposed direct dialogue with Mr Tlais, if a sale of Namelex’s 50% of NTA (either to Mr Tlais or a Mr Sarkis Sarkis) which had been mooted for a while, did not go through. The idea was that Gallaher would disclose “the true position as Gallaher see it” and that Gallaher would propose supplying goods with a significant free component which would be covered “from within his higher buying prices”. The objective was to produce a position where the free goods supplied would repay Mr Tlais’ investment over time and provide Gallaher with a higher than planned unit margin which would, again over time, repay the JL Spirits debt. The meeting decided that Mr Jack would discuss the proposal with Mr Clarke and invite Mr Tlais to Weybridge.

The “true position as Gallaher see it,” which Gallaher was later to explain to Mr Tlais was that Mr Hadkinson had told him that the free goods were coming from Gallaher, when they were not; and that the provision of free goods was Mr Hadkinson’s responsibility and not Gallaher’s.

Gallaher by now recognised that Mr Jack had made errors in allowing so great a build up of stock by Namelex and that he should be closely supervised by Mr Saad. Mr Tlais himself had noticed, from the summer of 2000, that warehouse space in Limassol was becoming unusually limited with high quantities of Gallaher’s products arriving including Sovereign Classic, Sovereign Black, Dorchester and Mayfair. He believed that Mr Hadkinson was selling goods to a well known Ukrainian smuggler. Mr Hadkinson professed an ability to sell all these goods.

Also on 4^th March 2002 a long letter was received by Gallaher from Highstreet in which Mr Tlais claimed to have invested over $ 60 million in the business (Footnote: ¹⁵). The letter painted a rosy picture of trade. Mr Tlais claimed to have received an order for 300,000 cases per annum at $ 30 per case for Iran. He indicated that his aim was to reach an average of 50,000 cases a month at $ 100 per case within a year – this would be over 10% of the entire Iranian market. The letter referred to the 258,000 cases already received “from you” free of charge and to the “commitment of Gallaher to support us in recovering the investments we have made in the various markets to date” exceeding $ 60 million. Mr Tlais claimed to be out of pocket for more than $ 40 million, even after receiving the 258,000 cases, and looked forward to finalising “the outstanding amounts due to us”.

By March 2002 Mr Clarke, who himself had lost out financially from Namelex’s collapse, had come to the view that Mr Tlais should be told that he had been deceived. He contacted Mr Jack and told him that matters needed to be brought to a head and suggested that Mr Tlais should travel to Weybridge for a meeting. Mr Jack arranged for Mr Tlais’ office to book a ticket to Milan (to put Mr Hadkinson off the scent) and for Mr Tlais to book a ticket to London on 10^th March 2002. Mr Clarke arranged to be on the same flight, swapped seats with Mr Tlais’ wife on the plane, and started to tell Mr Tlais what he knew.

He explained that the free goods Mr Tlais was expecting were not going to be delivered and that Mr Hadkinson had been deceiving him. Gallaher had known of Mr Tlais’ belief that he was to get free goods from them since at least the summer of 2001 but had chosen to keep him in the dark and they were worried that they might be liable to him. He also told Mr Tlais of the commission payments that were being made to Mr Hadkinson’s companies. He claimed to have been sidelined by Hadkinson and kept away from Mr Tlais. The discussion continued at their hotel. Mr Tlais was confident that Gallaher would find a way to resolve matters and reimburse him his losses.

Mr Tlais and Mr Clarke came to Weybridge the next day - 11^th March 2002. Mr Clarke met Gallaher management (including Messrs Rolfe, Keevil, Saad and Jack). Mr Clarke said that he had told Mr Tlais of the deception practised upon him, and expressed the view that Mr Tlais might be willing to work with Gallaher to devise a mutually acceptable method of dealing with all the issues.

Mr Tlais joined the meeting. He sought to hold Gallaher liable for his losses and made it clear that, if no amicable commercial arrangement could be made, he would pursue Gallaher at law. He accused Gallaher of misleading him and said that, had he been told the truth in September, he would have rejected $ 10 million worth of goods that had been paid for by letters of credit after Gallaher’s misrepresentations; that his losses in this respect were at least $ 5 million, since the goods had been sold at a loss, and that his losses in all were about $ 30 million, in respect of goods purchased and resold at a loss; which he had expected to recoup from the free goods (Footnote: ¹⁶).

Gallaher said that it regarded itself as a victim of his associates in Namelex, having suffered a £ 12.3 million write off in respect of debt and stock. Mr Keevil told him that any claim would be vigorously resisted and that his remedies were against those who had perpetrated the fraud upon him

The discussion then turned to consider what commercial arrangements might be reached. By now Gallaher’s objective was to sever its ties with Mr Hadkinson and his business with minimal financial impact and to ensure the continuation of Gallaher’s trading business. Gallaher also realised that Mr Tlais sought to recover his financial position by continued trading (Footnote: ¹⁷). Mr Tlais was prepared to take a pragmatic view and work out his problems by that means.

A week of meetings followed at the end of which it was agreed that a delegation from Gallaher would fly to Cyprus and Beirut in the week beginning 25^th March to meet with Mr Tlais and his family’s banks in order to confirm his financial position, his family being said to owe the banks $ 30 million. Gallaher agreed to collateralise the stock produced for Namelex and held in-bond in Cyprus and Dubai in order to support further letters of credit. Mr Tlais agreed to accept the ITP.

In a long letter of 21^st March 2002 to Mr Rolfe following the meeting between Gallaher and Mr Tlais, which Mr Hadkinson did not attend but about which he appears to have heard from Mr Tlais, Mr Hadkinson (who was still engaged in another attempt – also abortive - to obtain a letter of credit) referred to “our contribution to the distributors of some 258,000 cases free of charge” and to his having confirmed to Gallaher that “a further $ 30 million was also committed to the marketing and developing of the products, a fact that was also reconfirmed by Mr Tlais”. He referred to Mr Tlais’ claim to be reimbursed by Gallaher, to Gallaher’s letters of 13^th September, 6^th November and 21^st December 2001; and to the need for Mr Tlais “to be provided with the true picture in that the 258,000 cases given to him free of charge was paid for by us (or invoiced to us) and that the US $ 30 million was also being made available by us (but supported by Gallaher)”. He also referred to 135,000 cases of Gallaher’s goods then warehoused in Cyprus and Dubai, which were allegedly out of condition, which he wrongly understood Gallaher to have offered to give to Mr Tlais and which were ultimately pledged to the Bank to secure Mr Tlais’ obligations (see paragraph 269(i) below).

Mr Hadkinson also asserted that Namelex had been encouraged to sell goods back into the UK and had knowingly supplied goods for Iraq. He referred to Mr Jack having met Uday Hussein. Mr Jack had indeed done so, to discuss the possibility of doing business once sanctions were lifted. I consider the issue of supplies to Iraq in paragraphs 538-566 below.

Mr Rolfe replied on 12^th April 2002 stating that Gallaher had never given any indication that support of the brands, whether by free stock or otherwise would be reimbursed by it and denying any responsibility for 258,000 cases or the $ 30 million.

By April 2002 Mr Tlais was clearly relying on the September and December letters. A note of a meeting of 16th April records Gallaher being told that Mr Tlais’ banks had seen letters which confirmed that Gallaher owed Mr Tlais $ 30 million.

At the end of March Mr Jack, Mr Jon Moxon, Gallaher’s financial controller, and Mr Stephen Perks came to Cyprus to visit the Tlais’ family bankers. They met Simon Farah, the manager of the Cyprus branch of BLOM. Mr Farah said that he was under considerable pressure from head office. He saw foreclosure as a last resort but made clear that his job was on the line. If Gallaher could deposit $ 5 million as security, he thought that his head office would approve further letters of credit in the region of $ 3 million.

They then flew on to Lebanon, where they were shown the apparent assets of the Tlais family – two homes, three petrol stations, two coffee shops/restaurants, an unfinished hotel and parcels of land. It appeared that the Tlais were people of influence in Lebanon as well as Cyprus.

They met the manager of Abu Ahmed’s local bank - Banque Libano-Francaise – for a token visit. Then they met Mr Jihad Bassil of the same bank. Mr Perks was impressed by him. He was told that the Tlais family was overdrawn by about $ 12 million; that that amount was well outside the bank’s lending policy; and had been reviewed by head office in France. Mr Bassil said that he, himself, could not survive another audit without taking action; and that the Central Bank was monitoring the combined risk to both banks. He confirmed that the bank had security in excess of the loan apparently in the form of property but that it would be a last resort to enforce it.

In the event, despite some misgivings as to whether there was an element of stage management in what he was being shown, Mr Perks reported to Mr Rolfe that Mr Tlais had debts of $ 18,000,000 with BLOM in Cyprus and Abu Ahmed had a debt of $ 12,000,000 with Banque Libano-Francaise in Lebanon; and that both banks were reluctant to foreclose but were both operating outside their credit policies and could begin foreclosure within a fortnight. A forced sale would be at a significant discount, would damage the Tlais’ reputation and weaken their influence particularly in respect of the collection of monies, and would have a negative impact on Gallaher’s business and future development in the region, probably leaving little opportunity for the recovery of outstanding debts. But if Gallaher could provide $ 5 million in an interest bearing account in each of the two banks, they would be willing to provide credit lines totalling $ 4.3 million to Mr Tlais which would give him the liquidity needed to purchase Gallaher’s goods.

Mr Perks expressed the view that Mr Tlais had been duped and been far too trusting of his associates in Namelex. He recorded that the Tlais family appeared genuine, open and transparent about their financial position, albeit the ownership of their assets had not been formally verified nor confirmed as free of charge.

Thereafter negotiation of what became the TEL Agreement took place between Messrs Keevil, Jack, and Moxon and Mr Falvey (in Gallaher’s NBD) at a meeting on 16th April. The final negotiations took place between Mr Keevil and Mr Jack, for Gallaher, and Mr Saveriades and Mr Tlais for TEL on 29^th and 30^th April in Cyprus.

At the end of April 2002, Gallaher signed with Mr Tlais:

The letter dated 29^th April 2002 was actually signed on 30^th April. It set out the arrangements which were to be, and in the event, were entered into. These included:

The Waiver Agreement between Gallaher Group Plc, on behalf of itself and its subsidiaries and other members of the Gallaher Group, Mr Tlais and Highstreet recited that:

“(3)

Representatives of NTA or persons associated with NTA, most notably one Charles Hadkinson has (sic) made representations to the Gallaher Group, Mr Tlais and Highstreet Enterprises which could potentially result in disputes between them

….

(5)

The parties hereto desire to acknowledge, represent and warrant to each other that there are no direct or indirect actions, claims or disputes arising out of or related to the Distribution Agreement [i.e. the Namelex Agreement] or otherwise between them.”

By the TEL Agreement the parties agreed, acknowledged, mutually covenanted, and represented to each other as follows:

“1.

There are no direct or indirect actions, claims or disputes between them of whatever nature whether actual pending or prospective (a) arising out of or in connection with the Distribution Agreement or (b) any other course of trading relationships, business dealings, discussions or exchanges of correspondence between (i) GI or other members of the Gallaher Group or their respective directors or employees and (ii) NTA, Mr Tlais or Highstreet Enterprises ……

2.

If any party to this Agreement believes that it has any such claim as is described in Clause 1 of this Agreement such claim is hereby irrevocably waived.”

The form that the arrangements with the banks ultimately took was that Gallaher was to deposit $ 5 million with BLOM in a blocked account (inaccessible by Gallaher or BLOM) as security for the banking facilities extended to Mr Tlais’ brothers Fahad and Mohammed and the signatories to their accounts (“the Customers”) in respect of various accounts numbered 895296, and would be credited with interest. At the end of the five years the deposit would be released to the bank for payment of any debts of the Customers and any surplus then paid to them. Mr Tlais would make annual payments of $ 1,000,000 to Gallaher.

By his personal guarantee, signed on 30^th April 2002, Mr Tlais undertook that:

“ …..

(c)

[if] I fail to make any annual payments of U.S. $ 1 million to [Gallaher] in accordance with the agreement contained in the letter signed by [Gallaher} and me on 30th April 2002

I will within six (6) months from [Gallaher’s] demand to me ….reimburse to [Gallaher], without any set off, deduction, withholding or impost whatsoever ….(b) the difference between the said US $ 5 million [Gallaher] has pledged to BLOM and the value of the amount that I have repaid to [Gallaher} at the date of demand ….”

The $ 5 million was wired to BLOM on 2^nd May 2002 for value on 6th May and Mr Tlais agreed to pay the $ 1 million due annually on 5^th May in each of the years 2003 to 2007.The arrangement with the Banks was that BLOM would provide a guarantee to Banque Libano Francaise.

An attachment to the letter dated 29^th April 2002 stated that the stock available as collateral to BLOM was as follows:

By clause 2(i) of the TEL Agreement Gallaher appointed TEL as its exclusive distributor in named Territories for named Brands. The Brands were Sovereign Classic and Dorchester International (both Virginia blends), and Stateline (an American blend brand), together with Lights versions of each of these brands: clause 1(i). The Territories were defined as being the “domestic duty-paid markets” listed in Schedule 1, which included 6 Middle Eastern countries (Iran, Iraq, Jordan, Lebanon, Syria. Yemen), 5 Latin American countries (Argentina (Footnote: ¹⁸), Brazil, Chile (Footnote: ¹⁹), Paraguay, Uruguay), 3 North and East African countries (Egypt (Footnote: ²⁰), Libya, Sudan), together with Afghanistan and Pakistan (Footnote: ²¹).

Clause 3 (i) provided that, unless otherwise agreed, the Brands should be delivered to the port of discharge at the destination market in the Territories in accordance with Incoterms 2000. Risk of loss was to pass in accordance with those terms. Clause 3 (ii) provided that Gallaher would place identification marks on all cigarette packets. Clause 3 (iii) provided for TEL to make all the arrangements for transferring the Brands from the delivery destination in the Territories to registered warehouses and then to its customers and Clause 3 (iv) made TEL responsible for paying all excise duties imposed in the Territories on the Brands supplied by Gallaher in accordance with all applicable laws or local requirements.

Clause 3 (v) provided that, in the event of goods being shipped by Gallaher to an intermediate port rather than direct to the destination market,

“promptly after the arrival of each shipment of the Brands in the Territory, and in any event within (7) weeks of the arrival of any shipment of Brands to a territory, the Distributor shall supply to GI or Gallaher evidence of the shipment of the order to the appropriate Territory.”

The TEL Agreement obliged TEL to establish appropriate distribution structures in the Territories. Thus:

The TEL Agreement made plain that the Brands were intended to end up with customers in the Territories and that TEL could only sell to customers of whose bona fides they were satisfied. Thus:

Clause 4(i) required TEL to “market and promote the Brands in strict compliance with… all applicable laws, regulations or local requirements in the Territories” and in particular to “take no action to promote or facilitate the resale of the Brands by the Distributor’s customers or subsequent purchasers in violation of any fiscal, labelling, trade or other laws”.

TEL was also obliged to ensure that it did not hold excessive stocks of Gallaher brands, having regard to estimated demand. Schedule III to the TEL Agreement obliged TEL to

“use its best endeavours to limit stock in each Territory to not more than two (2) calendar months in market sales per territory.

In the event that stocks in any Territory exceed two (2) months in market sales for whatever reason, including but without prejudice to the generality of the foregoing a reduction in sales levels and / or an inequality of shipping schedules the Distributor shall immediately notify GI in accordance with the provisions of clause 12(xi) of this Agreement (Footnote: ²³).”

Clause 4 (viii) of the TEL Agreement obliged TEL to:

“ keep full, proper and accurate accounts and records showing clearly all sales transactions and inventories relating to the Brands and all services rendered by the Distributor pursuant to the Agreement and … produce the same to GI or its duly authorised representatives upon reasonable notice. The Distributor shall retain all such accounts and records for at least six (6) years or more if required by applicable law.”

By clause 6(ii) Gallaher retained the right in its absolute discretion (but where possible with prior reasonable notification) to modify the Brands or to cease supplying them. On 24^th January 2003 the TEL Agreement was varied with effect from 1^st May 2002. As varied it provided that, in the event of cessation of brands, Gallaher would use its best endeavours to reach an agreement with TEL to introduce a substitute brand(s) with a view to putting the parties in the same position as they were prior to the cessation of the Brand(s), as soon as reasonably practicable, but without prejudice to clause 12 (iv), which provided that, without prejudice to Gallaher’s rights under clause 6 (ii), the parties could amend the Brands by addition or deletion by written agreement at any time.

Schedule VI to the TEL Agreement contained a business plan (which had been formulated by Mr Clarke and Mr Jack) specifying in considerable detail the volume of sales and sales prices contemplated for different regions, the prices to be charged by Gallaher, the credit terms and the resulting gross profit and operating profit. But by clause 7 (i) (a) Gallaher was entitled to notify TEL of price changes and TEL was bound to pay any altered price (whether notified or not). When the TEL Agreement was amended in January 2003 clause 7 (i) (c) was added. It recognised that Gallaher might need to make “aggressive” price increases, particularly in the early years of the Agreement, and provided for maximum increases, subject to a proviso in clause 7 (i) (d) that Gallaher could seek a further price increase in the event that it could show that its costs had risen by an amount significantly ahead of the maximum increase allowed.

Schedule VI specified the expected volumes to be sold up to April 2004. These had been described in the 29t^h April letter as being “provisionally agreed”. That letter had indicated that “early indications are that these numbers may be, as you suggested, conservative”. Gallaher contends that these numbers were in fact inflated, by a combination of Mr Jack’s optimism about the prospects of the business and Mr Clarke and Mr Tlais’ tendency to exaggerate the success of Gallaher brands in the Namelex territories. The figures included 20,000 rising to 30,000 cases per month to Iran.

Clause 10 (i) of the TEL Agreement provided that, subject to clauses 10 (ii) and (iii), it should continue until terminated by 3 months written notice to expire on or at any time after the fifth anniversary of the Effective Date, which was 1^st May 2002.

However, Recital B recorded that:

“The Distributor …..wishes to become GI’s exclusive Distributor in the Territories for the Brands for an initial period of 5 years, to be automatically renewed at the end of that period for a further 5 years subject always that [three conditions were then specified]”

The words underlined were inserted in manuscript before the TEL Agreement was signed. The previous typescript draft had read:

“for an initial period of 5 years with the option to extend that period if GI and the Distributor agree to do so and has [sic] the ability to effect the efficient and universal distribution of the Brands in the Territories subject to [the terms and conditions of the TEL Agreement and the ITP]”.

The manuscript amendment crossed out “with the option to extend that period if GI and the Distributor agree to do so and”; added “to be automatically renewed at the end of that period for a further 5 years subject always that” and then two further conditions, lettered (a) and (b), before (c) which read “the Distributor has the ability etc”.

Clause 10 (ii) gave each party the right to terminate the TEL Agreement, on written notice, forthwith if the other party committed:

“a material breach of any of the terms or conditions of this agreement, provided that in the case only of a breach which is capable of remedy no such notice of termination shall be given unless and until a notice has first been given to the party in default specifying the breach and requiring it to be remedied and such last mentioned notice has not been complied with within 30 days or such longer period as may be agreed in writing between the parties…

Clause 12 (1) provided:

“The Distributor acknowledges and accepts that GI and Gallaher intend to co-operate with governmental or valid regulatory enquiries into any illegal importation and sale of the Brands sold pursuant to this Agreement or otherwise.”

In addition to the new goods that were to be supplied under the TEL Agreement there were 3 parcels of stock (“the Old Stocks”), totalling over 3 billion sticks, which, in the end, TEL had available to sell:

The Gallaher Old Stocks in Cyprus and Dubai were at least a year, some almost two years, old. Some of them were in poor condition. A Gallaher internal report of 2^nd July referred to an unacceptable yellowing of the paper on stock in Cyprus and suggested, on the basis of experiments by Gallaher’s Research and Development Department (“R & D”), that goods in paper outers (as some of the Old Stock was) would deteriorate more rapidly than those in hard outers.

On 12^th July Mr Jack wrote to the Dubai warehouse to complain that, whilst the product held in the temperature controlled area was in good condition, a significant percentage of the inventory was held in ambient condition and samples displayed distinct signs of deterioration. In May 2003 he told Mr Rolfe that the goods were in very poor condition when Gallaher passed them over and were in a much worse condition then.

In the negotiations which led to the release of the Gallaher Old Stocks in Cyprus and Dubai to TEL free of charge to TEL in November 2002 ( see paragraphs 353-355 below) Gallaher had initially sought to make $ 20 the minimum price (a modest amount) at which the goods would be deemed to be sold, and which would be paid to them; but shortly afterwards Mr Rolfe agreed with Mr Tlais’ suggestion that, if he was to bear the full risk and associated costs linked to the sale, then he should have the full benefit. In his letter of 19^th November 2002 Mr Rolfe expressed the view that there remained significant value in those stocks.

At the same time in a letter of 22^nd April 2003, in which he complained of new deteriorated Dorchester stock supplied to him, Mr Tlais said that he “had the experience of the Old Stocks, which include Dorchester Paper Parcel which are now two and half years old that are still shining examples of your production”.

The condition of the 365 day goods is less apparent. On 18^th December 2002 Gallaher’s R & D advised that, in respect of five parcels of old stock (totalling 3,358 cartons), 4 (totalling 2,602 cartons) were unsuitable for sale on the grounds of paper yellowing. Mr Jack had said to the person responsible for dispatch that the product was being sold as “old product”, that he did not feel the need to examine it and that it should be dispatched.

About 58% of the Old Stocks, excluding the 365 day goods, were Sovereign and Dorchester Lights products. The 365 day goods had a significant proportion of Lights also. Lights were popular in Teheran, although volumes were low, and in Lebanon (where Lebanese health warnings were required, which the Old Stocks lacked). The main demand in the TEL Territories was for full flavour cigarettes. Stateline had been originally supplied to Namelex for sale to the Romanian duty free market with brown filters and there was no demand for it in the Territories. Gold Arrow and Gold Arrow Lights and Businessman had been produced under a contract manufacturing agreement between Gallaher and Namelex. There was no demand for these products in TEL’s territories.

Sovereign Full Flavour was the product for which there was the most demand. It was a popular brand in the UK and the rest of the EU. It had gold packaging similar to Benson & Hedges. For these reasons it was attractive to smugglers. Some of the Dorchester and Sovereign cigarettes were, as I have said, in paper parcels rather than the hard outers which were preferred in the TEL territories. Dorchester Black was a premium UK brand with no market in the TEL territories but a high demand in the UK. It, together with Mayfair and Sovereign Black, had been supplied to Namelex initially but later discontinued after Namelex had protested about the control risks of selling such a product, in that its high cost and the lack of market demand for it would tend to mean that it would be smugglers who would be interested in purchasing it.

The Old Stocks were predominantly stocks with a global English health warning (although Businessman had Arabic as well), which meant that they could only be sold duty free in most of the TEL territories; and no pack coding showing the intended destination, having been produced before Gallaher introduced a system of country coding.

Mr Tlais would prefer not to have had to clear the Old Stocks. He had suggested to Gallaher that they should be destroyed and that Gallaher should provide some additional commitment to TEL to act as security to the bank in order to support trading. Gallaher did not want to destroy the goods. It hoped, initially, to recover some value for its Old Stocks in Cyprus and Dubai; and did not want to have to write off the 365 day goods which it had produced.

The decision not to destroy the goods left Mr Tlais with product that, to the extent that it was deteriorated, was likely to be difficult to clear. As Mr Stewart Hainsworth, who became responsible for Gallaher’s AMELA division in April 2004 confirmed, the sale of such product is prejudicial to the brand, and may sour relationships with dealers (see, by way of example, OTI’s letter of complaint of 29^th May 2003 (Footnote: ³¹)) or lead them to seek to dump it somewhere. As to the latter smugglers seek, if they can, to buy normal quality cigarettes at a cheaper price and avoid payment of duty. Poor quality cigarettes are not inherently attractive to smugglers. But, in general terms the lower the quality or condition of the product the more likely it is to find its way down the chain from legitimate distributors who do not want to keep it (at a cost), to less scrupulous ones, who may divert it and sell it to customers who are more tolerant of poor quality because they are getting the product cheap. In short low quality is a risk factor in respect of smuggling.

Gallaher contemplated that the Old Stocks (except for the 365 day goods) would be cleared into non-core markets and not the key markets such as Iran. On 10^th July 2002 Mr Jeffery informed HMCE that, where it was possible to sell the Old Stocks (then still owned by Gallaher) in Cyprus, this was to occur in Africa over the next 12 – 15 months, although much of the stock was likely to be destroyed in Cyprus because of its condition. That was not, however, Mr Rolfe’s understanding. He thought that the stock was to be sold in TEL territories (not just the African ones) over a nine month period. Mr Jeffery had referred in his letter to plans being in progress to destroy the “first element of circa 94 millions”. These were Gallaher’s Dorchester Black cigarettes with a UK health warning which were at that stage due to be destroyed because they represented a control risk (Footnote: ³²). Mr Jeffery may have been in error in thinking that there was at that stage any more which Gallaher thought should be destroyed. African markets were a distinctly possible place for disposal. In a memorandum of 18^th July 2002 Mr Jack expressed himself particularly hopeful of clearing aged stocks in Sudan and Libya (and, also in the Yemen)..

TEL proposed to clear the Old Stocks by mixing them with fresh stock in the proportion 80% fresh, 20% old. In a letter of 2^nd August Mr Jack expressed the hope that TEL would focus on sending the best quality stocks to “our better partners” whilst recognising that TEL was doing its best to clear the “other less fresh goods”. Insofar as this mixing involved customers in receiving 20% of goods which they may not really have wanted it involved some control risk, since purchasers might try to dispose of the unwanted stock to unscrupulous sub-purchasers.

Schedule VI to the TEL Agreement contemplated, as I have said, that the Old Stocks would be cleared by February 2003. In fact they were not cleared, as a result of a series of problems including the fact that Sovereign had on occasion not been supplied at the levels expected for mixing and the problems thrown up by the damaged Dorchester. By June 2004 Mr Jack was referring to 512m assorted goods “of considerable age and highly doubtful condition” either purchased by Mr Tlais via Namelex or transferred to him by Gallaher which would have to be destroyed by Mr Tlais “or they will represent a block to new business and a constant threat and concern with regard to diversion”.

It was Gallaher’s aim to have TEL’s goods shipped, wherever possible, direct to their destination markets – a course which would significantly reduce the danger of smuggling. Gallaher has expressed itself to be very keen on this in a letter to Mr Tlais of 19^th May 2003. On 1^st October 2003 it had required it for all shipments from 1^st January 2004. Save for a shipment of 8,000 cases to Port Said in June 2004 for Egypt, and some shipments to OTI and to the Lebanese monopoly, direct shipment did not happen. Mr Tlais put forward the need to mix the Old Stocks in Cyprus and Dubai with new goods, in order to clear them, as a prime reason why shipment direct to market could not take place. It is debatable whether mixing in Cyprus/Dubai, as opposed to supplying any given market with new product, shipped direct from the UK, and Old Stocks shipped from Cyprus/Dubai, was essential. Mr Tlais at one stage suggested that Gallaher should take the Old Stocks back to the UK for the mixing to take place there, prior to direct shipment to destination market; but Gallaher had turned this suggestion down. Another reason relied on for not shipping direct to market was the need to keep the goods under Mr Tlais’ control and release them only against payments that would improve the customer’s debit position.

The Gallaher Old Stocks in Cyprus and Dubai were said by TEL to be pledged to BLOM. According to paragraph (viii) of the Banking Matters section of the letter of 29^th April the stock was to be security for a guarantee by BLOM in favour of Banque Libano Francaise. Mr Richard Hill, Counsel for TEL, told me in opening that the bank allowed cigarettes to be released from the security if they were replaced with fresh stock. No pledge documentation has been produced nor any documentation evidencing the release of goods from the pledge. Mr Fawaz, who did not believe there was a pledge (Footnote: ³³) asked for the pledge documentation at the time. Mr Clarke told me that TEL had asked the bank for it. In the light of Mr Tlais’ evidence it appears that there was none.

Mr Tlais’ evidence was that goods could not be officially pledged to the bank if they did not have a certificate of freshness and that Simon Farah, the BLOM bank manager in Cyprus, would be fired for doing so. But he had given a commitment to him that the goods which Gallaher was providing and other goods, would stand as security for $ 6 million. I accept his evidence that there was some sort of security commitment given, which was constituted or evidenced by certificates of deposit in the name of the bank or other documentation referring to the bank, examples of which appear in the disclosed papers. In respect of goods in Dubai all that had happened was that Mr Tlais had undertaken that he would not release goods without informing the bank in advance.

Clause 4 (xxi) of the TEL Agreement provided that TEL would:

“conduct its business in accordance with the policy on International Trade of the Gallaher Group (as amended by Gallaher Group from time to time)".

Mr Tlais and Mr Saveriades signed the ITP on behalf of TEL under a paragraph stating:

“I have read the above policy and confirm that I understand it and will be bound by its terms in all dealing with companies of the Gallaher Group. I further confirm that I will obtain the same undertaking from any sub-distributors to whom I supply any products of the Gallaher Group”

The ITP stated that:

“In the event that Gallaher discovers that any particular distributor has been shown to be behaving improperly or Gallaher has reasons for believing that they may be, Gallaher will re-visit that trading relationship with a view to discontinuing that relationship, if appropriate. In particular, if Gallaher concludes that any distributor is a smuggler it will terminate that trading relationship with immediate effect. In turn, Gallaher will expect its distributors to endorse a similar policy in respect of their customer.”

The TEL Agreement and associated arrangements had benefits for both sides; probably more for Gallaher, which had a superior bargaining position, than Mr Tlais. For Gallaher they represented a clean break with Namelex and Mr Hadkinson; offered the prospect of recovery in respect of its stocks in Cyprus and Dubai (which might enable Gallaher to write back some stock previously written off); sold the 365 day goods; provided a new distributor; and tied that distributor to a contract designed to ensure the legitimacy of its business and required it to demonstrate to Gallaher the steps that it had taken, and procured others to take, to ensure that legitimacy.

The arrangements were also designed by Gallaher (as it told HMCE) to be terminable if significant volumes of Gallaher product were found to be coming back to Europe. This was presented to HMCE as a fulfilment of Gallaher’s policy on smuggling and a compliance with what HMCE required. Mr Jeffery provided HMCE with a copy of the TEL Agreement on 10^th May 2002, stating that Gallaher had tightened the control provisions that had been in the Namelex agreement. He said that Gallaher did not believe “that Mr Tlais or Tlais Enterprises were involved in the aspect of NTA’s business that has created so much difficulty for both of us”.

For Mr Tlais the TEL Agreement provided relief from the prospect of imminent foreclosure by his banks; and offered the prospect of building a profitable and sustainable business and trading out of a difficult financial position. His ability to do so was dependent on Gallaher’s support. But the arrangements left him vulnerable in a number of respects. He got nothing in respect of his free goods claim or his past losses. He still had his Old Stocks, which he was going to mix with new goods that he ordered (Footnote: ³⁴). He had to pay for the 365 day goods when the credit expired. He had the right to distribute the Brands, in particular Sovereign and Dorchester, but Gallaher could withdraw them. In addition the TEL Agreement contained several onerous obligations and a right of termination for any material breach. In the years that followed Mr Tlais endeavoured to put himself in a better position than that which the TEL and associated agreements afforded him.

The TEL Agreement was signed at Mr Tlais’ house, in Cyprus, Gallaher being insistent on it being signed by the end of April. Mr Clarke’s evidence was that Mr Tlais had not been able to seek detailed advice from either Mr Saveriades or UK based lawyers; but had been comforted by Mr Jack’ assurance in strong terms that the TEL Agreement was fair and not unduly favourable to Gallaher and that Mr Tlais could trust him. Mr Jack pressed him to sign. I accept that Mr Jack said something to that effect.

Mr Clarke agreed to work for TEL. Mr Keevil of Gallaher and Mr Tlais had assured him that they were grateful to have his assistance, and that his past involvement with Namelex would not be a bar. It was Mr Jack’s view (which he expressed to HMCE) that Mr Clarke had acted in Gallaher’s best interests by staying on with Namelex after 30^th April at the request of Mr Tlais (until others in Namelex became aware that he was in contact with Mr Tlais and Mr Jack (Footnote: ³⁵)) and providing information about the progress of Namelex’s attempts to procure a letter of credit, and by signing the letter terminating the NTA agreement. Mr Tlais regarded himself as in Mr Clarke’s debt for coming clean on what had happened. Mr Clarke started work for TEL on 1^st July 2002. Thereafter he had regular involvement with Gallaher and was, in the main, the drafter of letters to Gallaher from Mr Tlais.

On 7^th June 2002 Mr Tlais concluded a written agreement with Mr Hadkinson by which Mr Hadkinson agreed that he owed Mr Tlais $ 30 million in respect of Mr Tlais’ losses and agreed to pay it by the end of the year. The recitals to the TEL Agreement recorded that the business of NTA was funded exclusively by Mr Tlais or through funds obtained by him under his personal guarantee and that the funding of the business had been based on false representations by Mr Hadkinson to Mr Tlais which had caused him “heavy personal financial losses”.

On 19^th September 2002, Mr Tlais succeeded in obtaining waiver letters from Mr Hadkinson in which he acknowledged to Gallaher:

“that in respect of any assertions of impropriety that I may have made against the Gallaher Group or employees thereof, I now realise I was mistaken and I withdraw any and all such assertions in their entirety. I also irrevocably undertake to refrain from making any such allegation in future, which I acknowledge could damage the good name and/or reputation of Gallaher Group or its employees”.

A letter from Mr Hadkinson of the same date records that he had signed this letter on the understanding that it would not be released until he had approved a

By May 2002 Iran had recently opened its markets to importers. Dorchester International had been one of the he first duty paid imported brands. It was, however, a Virginian blend, when the predominant blend preference was for American blend cigarettes.

All new stock produced for TEL was coded in a manner which identified (a) the first purchaser (such as TEL) and (ii) the intended final destination market. This system had been adopted by Gallaher since late 2001 for new production.

Gallaher hoped that the problems which had led to Namelex being red carded would become a thing of the past. However, in late May 2002 OLAF raided Mr Tornarides’ offices in Cyprus and seized about 11,500 documents some of which suggested a close relationship between Mr Tlais and CT Tobacco. Mr McCallum of HMCE was involved in the raid and reported on it to Mr Keevil and Mr Jeffery at a meeting on 27^th May 2002. He was concerned that the relationship had continued after Customs had agreed with Gallaher that Gallaher, Namelex and its distributors would not supply CT Tobacco after February 2001. At the end of the meeting he provided Gallaher with some of the documents seized.

Among these documents were:

In the course of the meeting Mr McCallum remarked that he had been told by Mr Clarke that Namelex was owned by Hadkinson and Nammour, no mention apparently being made of Mr Tlais. He regarded himself as having been misled. It is possible that he treated what he had been told about Namelex (i.e. Namelex Holdings Ltd) as applicable to NTA (i.e. Namelex Trading Agencies Ltd) and that the distinction had never been explained to him. At any rate he had not been told of the Tlais – Namelex link.

Mr Jack was dispatched to Cyprus to investigate the matters raised by HMCE. He reported being told that all but two of the documents were “created by a third party without the knowledge of Mr Tlais”. The areement for rescheduling related to an aged debt “which has always been disclosed to us”, and the letter of credit was part of a circular transaction in which Mr Tlais was to buy Mr Tornarides’ stock and sell it back to him at a different price as part of a mechanism to mitigate his debt. Mr Tlais’ brother was said to have issued a letter of credit to Mr Tornarides but the one opened in favour of Tlasco, which the Customs had seized, was only issued for half the agreed value.

On 31^st May 2002 Mr Tlais wrote to the Board of Gallaher in order to “clarify my position as regards my business association with CT Tobacco and/or Mr Tournaritis”. What he said included the following:

Mr Tlais also told Gallaher that he had been invited to take an equity position in NTA and nominate a director in return for making available the necessary credit lines in support of the business; but that many things had been said and done in his name without his knowledge to the detriment of his business and reputation. He expressed himself happy to give more detail in a meeting with Customs. Mr Tlais’ letter as well as his indication of a willingness to meet was relayed to HMCE.

From an early stage of the TEL era Mr Tlais made clear to Gallaher his view that Sovereign was attractive to smugglers (“the target of some of the biggest organised crime gangs in the world, for their smuggling operations”: see TEL’s letter of 25^th October 2002) and that what he wanted was a replacement brand. He pointed to the fact that the same problems did not arise with Dorchester cigarettes, which he alone controlled, as had arisen with Sovereign. He repeated his concerns about Sovereign and his wish for a replacement on numerous occasions. He made a number of suggestions for alternative sources of revenue including being allowed to sell duty free in Romania (part of Austria Tabak’s business), an extension of his territories to include the Gulf States, or payment of the $ 30 million which he claimed to have lost from the free goods deception, to which he frequently referred.

There was an additional factor which made Sovereign attractive to smugglers. It was sold in low duty environments so that, even if purchased duty paid it could be profitably smuggled into a higher duty market, possibly by smugglers purchasing in small quantities and consolidating before export to the UK (“hoovering up”). Sovereign Classic had been withdrawn from the CIS market in part because of the smuggling risk (although the amount of product supplied in the CIS was relatively small – about 150 million sticks in 2000). At the same time, in default of any substitute, Mr Tlais needed supplies of new Sovereign in order to have the income to pay off his debts, and to mix with the Old Stocks that he had acquired. Of the two other brands – Dorchester and Stateline – Stateline was not established in the TEL territories and had very limited prospects.

A meeting took place in early July in Cyprus between HMCE (Messrs McCallum and Marcanik), Gallaher (Messrs Keevil, Jeffery and Jack) and Mr Tlais (with Mr Saveriades in attendance at some point). On 28^th June 2002 there was a preparatory meeting in England attended by all those except Mr Tlais and Mr Saveriades. At that meeting Mr Jack gave HMCE a lengthy presentation of the history leading up to the TEL Agreement. He expressed Gallaher’s view that the Sovereign Classic, which was the only brand that had returned to the UK in significant quantities, was related to the introduction of CT Tobacco to Mr Tlais by Mr Hadkinson.

Mr Jack expressed the view that Mr Clarke had worked in Gallaher’s best interests by giving Gallaher information on Namelex’s proposed letter of credit, by signing the 30^th April agreement terminating the Namelex agreement and staying with Namelex after 30^th April. He had also acted as a whistle blower to Mr Tlais. Mr McCallum said that Mr Clarke came over as untrustworthy. He took this view because Mr Clarke had put off meeting HMCE for several months when Namelex was struggling; and, when they did meet, had been evasive, not wanting to talk about Namelex’ business but only about arrangements to distribute Imperial Tobacco’s products. In view of HMCE’s concerns Gallaher agreed that Mr Clarke should not attend the Cyprus meeting.

Mr Keevil outlined Gallaher’s key controls which were incorporated into the TEL Agreement: (a) regular checks on products in the markets to ensure that presence was in line with market consumption expectations; (b) marketing cigarette packets with codes that identified the final purchaser and the final destination market; (c) direct delivery to market wherever possible; (d) provision of bills of lading to identify onward shipments; (e) health warnings in local languages where applicable, not including Iran, where non Arabic health warning indicated higher quality, or duty free outlets.

Mr Tlais indicated at this meeting that Mr Clarke would be largely dealing with administration, book-keeping and logistics, with no responsibility for dealing with customers or raising orders.

At the meeting in Cyprus on 3^rd and 4^th July Mr Tlais described the efforts that TEL would make to verify the existence of legitimate demand for Gallaher products in the Territories. He or his associates would check the markets and produce written reports. He expressed himself supportive of Gallaher’s desire, and that of HMCE, for strong controls. He said that he wanted to develop the TEL markets in a slow and controlled manner. He would “robustly adopt” the red/yellow card system.

Agreement was reached as to the controls to be put in place in the form of documentation that Mr Tlais was to provide to confirm the final destination of goods supplied. These were later set out in a “Procedural Agreement”: see paragraphs 328-333 below. Mr Tlais indicated that he understood TEL’s obligation to check to see that local distributors were operating properly and to communicate Gallaher’s philosophy to them. He undertook to provide a copy of his list of distributors to Gallaher, which could be shared with HMCE. It was also agreed that HMCE would be supplied with Mr Tlais’ sales data on a monthly basis, which would be incorporated into the export sales data already supplied by Gallaher monthly, and which would broken down to show quantity and final destination market. This never happened.

Gallaher indicated that it would whenever possible deliver product direct to the destination market and that, if this was not possible for security or other reasons, systems would be in place to obtain evidence that the product arrived at its intended market; once in the final destination market the aim would be to ensure that it remained there. Whilst this would be difficult in emerging markets, Gallaher would visit those markets and meet with major sub distributors and brief them on the ITP and the obligations it imposed upon them. Mr Tlais gave assurances that, despite the absence of formal contracts with distributors he would take all possible steps to ensure the continuation of Gallaher’s export policy “to the lowest possible denominator” (Footnote: ³⁷). Gallaher outlined a full monitoring programme of TEL and its distributors by regular market appraisals, stock control and warehouse checks.

On 2^nd August 2002 Mr Jack wrote to TEL asking for the customer list. Mr Tlais told Mr Clarke that he was not putting anything in writing. He was prepared to give Mr Clarke a list orally but did not want to give a list direct to Customs because – so he said in evidence - he did not want anyone to think that he was working with Customs or that he was trying to damage people. He put this attitude down to the fact that he was working in the Middle East and that, if he was seen to be dealing with the Customs, and “something, it happen, I will be killed next day”. He did not want to take the risk.

As a result Mr Jack put together a list based on what TEL told him, and he dictated this to HMCE in late August 2002. In November 2002 Mr Jack prepared a table, showing TEL’s customers and in December 2002 (having been chased by Mr Jeffery), Mr Jack provided a revised list of customers to Mr Jeffery. In January 2003 Mr Jack advised Mr Jeffery to add two more customers to the list as he had seen their names on shipping documents. These were Virginia Trading, with an address in Damascus, and Tashapukint Al Wakhrim, a Libyan distributor.

At the meeting in July Mr Tlais indicated that the Old Stocks in Cyprus/Dubai would be sold out in 12 to 15 months; that as they were mainly Lights (he gave a figure of 90%) he would have to mix them with the full flavour stocks in order to sell them. He also said that it would take about a year to bring the situation under control.

In May 2002 Gallaher decided to establish a new organisational structure for the New Business Development Division. That included a proposal to recruit, amongst others, a Regional Manager to oversee the AMELA region. The manager whom Gallaher selected was Mr Mounif Fawaz (“Mr Fawaz”). He had considerable experience in Middle Eastern tobacco markets having been employed by BAT for 20 years, latterly as General Manager of their Levant/Middle East business in Beirut. Part of the purpose of recruiting him was to provide closer supervision of Mr Jack. He joined Gallaher in September 2002. He knew from his past experience that Sovereign and Dorchester had no significant market share in the Middle East.

Mr Fawaz was suspicious of Mr Jack, whom he thought had got too close to Mr Tlais and was too confident in his view as to how much TEL could sell. He was also consistently very critical of TEL. When Mr Fawaz joined Gallaher he had heard through contacts in the Middle East that Mr Tlais was rumoured to be a smuggler. He came to regard TEL as, at best, a wholesaler rather than a distributor and, at worst, a smuggler - in the jargon “a DNP (duty not paid) reexporter” – a view he stated within Gallaher on a number of occasions. There was considerable personal antipathy between him and Mr Tlais. Mr Fawaz, who has, on occasion, a confrontational style, was not, in my judgment, motivated by malice. What he was motivated by was an unwillingness to tolerate someone masquerading, as he thought, as a major distributor when in reality he was something else.

Mr Fawaz’s view was that TEL was not “meeting the ABCs of the business” in that Mr Tlais did not know in detail who were the distributors, what the infrastructure of each market was, what the price structure was and how to submit sales and stock statements which would show the movement in the markets.

Mr Tlais was mistrustful of Mr Fawaz from the start, apparently on the basis of what he had been told by contacts of his in BAT. He appeared to Gallaher to be worried that Mr Fawaz would try and steal his customers. When told of his appointment in September he said that TEL’s in-market distributor in Iran (Parsian Fougan) would not want to share information about its customers with him.

In July 2002 HMCE expressed concern about several suspicious shipments of Sovereign in which TEL appeared to be implicated. In early August Mr Jack wrote to TEL. Mr Tlais replied with an explanation saying that such goods as had come from him were part of the Old Stocks which were committed for sale sometime ago. The details are as follows:

In a letter of 12^th August 2002 to Mr Keevil, Mr Tlais displayed some disquiet at Gallaher’s inquiries about these shipments and observed that “any movement of product especially Sovereign is being monitored to the point of paranoia”. He requested a meeting in Weybridge.

That meeting took place on 5^th September 2002; three days after Mr Fawaz had joined Gallaher. Messrs Rolfe, Keevil, Moxon, Saad and Jack represented Gallaher, and Messrs Tlais, Saveriades and Clarke represented TEL. Mr Fawaz was not there. Mr Tlais explained that he was selling off the Old Stocks more slowly than he had envisaged, partly as a result of concerns about where Sovereign was going to and partly in order to obtain a paper trail for HMCE showing delivery to the ultimate market. He also indicated that he wanted there to be a record of what had been agreed in July with HMCE.

In autumn 2002 BLOM had complained that 40,000 cases of Dorchester Paper Parcel, which formed part of the goods pledged to them, were unsaleable and required a $ 2,000,000 payment to resolve the issue. Mr Rolfe’s notes of the meeting on 5th September refers to the 40,000 cases as costing money but not saleable and records the need to establish what may be saleable and consider alternative means of providing a guarantee to the bank. Gallaher was keen to save the cost of storage and, if possible, the considerable expense of destruction. By 26^th September, when he wrote to Mr Rolfe, Mr Tlais had learnt that Gallaher was taking the view that the stock should simply be destroyed without replacement security, which Mr Tlais described as totally unacceptable.

Gallaher made a proposal to Mr Tlais that Gallaher would provide TEL with a short term loan of $ 1 million to provide security to the Bank. TEL should take over all the Old Stocks itself, sell them and remit a minimum of $ 2.9 million to Gallaher.

On 26^th October someone at TEL (the letter is signed M.K.) wrote to Mr Moxon of Gallaher declining to give a fixed commitment as to when TEL would pay both the $ 1 million and $ 2.9 million. Three options were put forward of which the third was the destruction of the goods and an additional loan of $ 5,000,000. In the end Gallaher rejected these proposals.

Whether or not the Dorchester paper parcel in Dubai was unsaleable is not at all clear. About 38,100 cases were released in 2002 and 2003. These consisted of 20,000 cases of full flavour and 18,100 cases of Lights at the Modern Freight warehouse. 5,000 cases of full flavour had been released in July 2002 to Adam Trading (and so could not have been the subject of complaint by the bank in autumn 2002) and a further 3,000 cases were released in January 2003. The remaining cases of the full flavour were also released to Adam Trading or, on one occasion, Drilon over the course of 2003 and appear on the TEL customer accounts with sales figures. The Lights were transferred (with the remaining full flavour) to the Gulf Agency warehouse and then to the Thomsun warehouse. What happened to them thereafter is not known.

Mr Clarke pointed out in evidence that a release to Adam Trading, or Drilon, did not mean that there had been a sale for which Adam Trading paid; and said that there had been many complaints about the product and in most cases money was not collected for it. Mr Tlais’ evidence was similar. In the absence of any evidence from Adam Trading it is quite unclear whether and to what extent Adam Trading had difficulty in selling these goods; and Mr Tlais’ comments in a letter of 22^nd April 2003 that he had “the experience of the Old Stocks which include Dorchester Paper Parcel, which are now two and half years old and are still shining examples of your production”, without reference to any defective parcel, suggests that they were not unsaleable.

Following the meeting of 5^th September Gallaher, Mr Tlais and HMCE entered into the “Procedural Agreement”, which was finally agreed in December 2002. The agreeement recorded the acceptance by all parties of Mr Tlais’ observations at the meeting in Cyprus in July that:

The procedure agreed was as follows:

The Procedural Agreement recorded the fact that Mr Tlais and TEL had signed the ITP and reiterated their commitment to the building of long term international domestic business and Mr Tlais’ abhorrence of smuggling “as a destroyer of market value”. HMCE agreed to provide the fullest available details in the event of seizure in order to trace the shipment back to the culpable customer. Mr Tlais confirmed that if he found a TEL customer involved in product diversion he would terminate supply immediately without further warning.

In his evidence Mr Clarke accepted that, even in the case of shipments to intermediate ports or to Cyprus and Dubai for mixing, TEL still needed to have systems in place to be able to demonstrate that the goods arrived at their intended final destinations. At the meeting in July HMCE had been told that systems would be in place to obtain evidence that goods reached their intended market. Mr Tlais accepted the same point. Mr Clarke also accepted that, even in the context of the Procedural Agreement, TEL undertook a responsibility to get the product to the intended final market and to demonstrate that this had happened as well as to monitor where it went once it got there.

Mr Tlais’ evidence was that he only ever committed to achieving 80% control of Sovereign, saying that “if he was a hero” and if he got the necessary cooperation he might be able to reach a position where he had 80% control of Sovereign. I do not accept this. It is inherently unlikely that Customs would have accepted a lack of control in relation to 20% of Sovereign shipments or that, if an 80% figure had been mentioned, there would have been no discussion about the balance. The suggestion that Mr Tlais’ commitment extended to only 80% is noticeably absent not only from the Procedural Agreement but also from letters that Mr Tlais wrote to Gallaher in 2002 to which I refer in the next paragraph (Footnote: ³⁸).

In his letter of 6th August Mr Tlais referred to the meeting with HMCE and said that he had advised HMCE that it would take around a year for him to discover the good and bad customers and that after about 1 year the situation would be under control. In his letter of 12^th August he referred to his commitment in the short to medium term to “bring everything under control”. Further on 15^th October 2002 he wrote to Mr Keevil:

Mr Clarke suggested in evidence that the Procedural Agreement was intended to replace the TEL Agreement in respect of the clearance of Old Stocks. I reject this for a number of reasons: see paragraphs 596-602 below.

In October 2002 Messrs Rolfe, Fawaz and Jack on behalf of Gallaher carried out a market visit to Iran which was attended by Mr Tlais and Mr Clarke for TEL. TEL’s chief sub-distributor was a company called Adam Trading, whose owner and principal director was Dr Khaled Al-Mahamid (“Dr Al-Mahamid”), whom Mr Rolfe met for the first time on this occasion. Dr Al-Mahamid and Mr Tlais had very close links. The distributor used by TEL/Adam Trading in Iran was called Parsian Fougan; although there my have been others as well. Hazem Mahmoodi Rashid (“Hazem”) and Sarfaraz Mobbarraki were directors and co-owners of Parsian Fougan.

Mr Rolfe flew to Dubai where he met Messrs Tlais, Clarke and Al-Mahamid and the group then flew on to Iran. The market visit was arranged by TEL or its distributor. The purpose of the meeting was to get some understanding of the Iranian market and to verify the supposed market of 50,000 cases per month for Dorchester and Sovereign.

The Gallaher party met with representative of the Iranian Tobacco Company (“ITC”). The ITC is the state-owned tobacco manufacturer and was responsible for the duty payment regime. They also saw the Teheran Bazaar where Dorchester cigarettes were available at wholesale level but there was very little evidence of their presence at retail level. Sovereign was not visible at all. When asked about the absence of Sovereign Hazem indicated that the demand was mainly in the rural areas and suburbs.

The party also went to Teheran, Isfahan and Rasht where they visited wholesalers supplied by Hazem, who was being supplied with stock by Adam Trading. They also visited some shops owned by Parsian Fougan.

Mr Tlais told Mr Fawaz that he was selling 20-30,000 cases into Iran per month, mainly Dorchester – a total of between 2.4 and 3.6 billion sticks per annum. If true this would have been about 5% or more of the entire Iranian cigarette market and a much higher portion of the value segment. This did not tally with what Gallaher saw in Iran or with a BAT paper on the Iranian market which Mr Fawaz had obtained from a contact there. This showed that consumption was primarily of American (i.e. non Virginian blends – no Virginian blends being in the fast moving stocks in all segments) and made no reference to sales of Dorchester or Sovereign (Footnote: ³⁹). When Mr Fawaz challenged Mr Tlais by saying that sales in Iran were inconsistent with the volume that TEL was ordering for Iran he was told that most of the Gallaher brands were sold in rural areas and along the border with Afghanistan.

Mr Fawaz was highly critical of the visit, which he regarded as heavily orchestrated. In an e-mail of 14^th October he expressed the view to Mr Rolfe (whose evidence was that he agreed – although his letter of thanks to Mr Tlais bears no such indication) and Mr Saad that:

“The way the market visit was structured did not give us the opportunity to verify the information provided by a selective wholesale [sic (Footnote: ⁴⁰)] regarding consumer demand… You did request to see a cross section of retail outlets and were not granted the opportunity.

Our observations, however, on packs and cigarette filters on the streets, the movement of brands provided by wholesale [sic] when they were not interrupted, packs carried by consumers, and small cigarette vendors did not point to any consumption of Dorchester and Sovereign in the 3 cities visited. In addition to this, Sovereign did not exist in distribution at wholesale point. For your information, 160 million of Sovereign are ordered every month.

It was therefore essential to strongly highlite (sic) this fact to our partner otherwise we would have emerged from the meeting agreeing with their views about a significant market demand which we cannot substantiate”

On the TEL side it was suggested that Gallaher showed limited interest in the retail side; but considerable interest in buying carpets; and that Mr Fawaz refused to take internal flights which restricted what could be seen.

After the visit Mr Fawaz engaged a market researcher, Hicham Ezzedine, a former employee of BAT, to visit 5 Iranian cities and rank the cigarettes he found in order of popularity, based on data given by distributors as to the movement of cigarettes. When he found Dorchester it was usually low down in the rankings. At a level inconsistent with 20,000 or 30,000 a month.

In October 2002 HMCE expressed concern to Gallaher on two counts. The first was a dramatic rise in the quantity of cigarettes exported to TEL. The second was a seizure of :

In his letter of 15th October 2002 Mr Tlais responded to this information by repeating his commitment that, within the region of 1 – 1 ½ years a strict level of control would be applied; pointed out that the actions of removing customers from the network had to start somewhere and that the quantity of goods seized was small as a percentage of those supplied; and warned that “large and powerful groups” were trying to purchase product from himself and his customers (Footnote: ⁴¹). He expressed the view that the Mozambique goods may not have originated from OTI and expressed himself unable to comment on the goods destined for Bulgaria and asked for full details; but said that, as a precaution, he had ceased supplying TSS “until we have proven who is responsible for this problem”.

In October 2002 Mr Fawaz had been pressing Mr Jack to obtain a sales and stock statement by market and customer. Mr Jack had been pressing TEL. On 22^nd October the production of the latest Sovereign order was put on hold pending its receipt.

On 31^st October Mr Fawaz and Mr Tlais met in Cyprus. The purpose of the meeting was to address three questions (a) the collateral pledged to the bank and the warehouse payments of £ 80,000 due monthly, which Gallaher was paying; (b) the recent Customs seizures in Italy and Tlais’ management of sales and orders in the Territories; and (c) the relationship with HMCE.

The meeting took place in Mr Tlais’ office and was conducted, largely, in Arabic. Mr Clarke was there some of the time but, since he does not speak Arabic, would not have understood much of what was being said. He was present at dinner afterwards where the conversation, which addressed some of the topics considered at the meeting, was in English. At the meeting Mr Fawaz expressed the view that the stock, which belonged to Gallaher and for which it was paying storage charges – with no clear indication as to how long this would continue - should be destroyed and no replacement security provided. Mr Tlais made it clear that, if that was to happen, he wanted a replacement security.

Various proposals were put forward by Mr Fawaz, who made a note of the meeting to brief Mr Rolfe. I do not regard this note as involving, as was suggested, a large amount of invention.

As the note reveals.

Mr Tlais’ statement that, if Gallaher wanted TEL to control shipments of Sovereign it would have to pay the $30.5 million that was outstanding to him from the Namelex era, was one example of a stance regularly taken by him, to the effect that if Gallaher wanted something, in particular adequate control of stocks, then they should be paying him his $ 30 million loss. Mr Tlais treated Sovereign as a product which he could use to obtain revenue whilst it lasted, and which he needed to use if he was to satisfy his bankers, whilst seeking financial compensation for dealing with it and for its withdrawal. But the TEL Agreement did not entitle him either to the $ 30 million, or to have the Old Stocks bought out, or to be left in a position where he was not reliant on Sovereign.

In early November 2002 Mr Fawaz held a planning session for the AMELA region. Mr Clarke attended. Mr Fawaz announced that he intended to replace Sovereign Classic and Dorchester International with a new portfolio for the Middle East concentrating on American blends for Iraq, Yemen, Lebanon and Syria. Mr Clarke did not want to lose either Sovereign or Dorchester but was happy to have new additional brands.

Later Mr Clarke met Messrs Rolfe, Keevil, Moxon and Jack. He reported that the business was doing well (Mr Tlais’ position having improved by $ 7 million since May); expressed concern at the halt in production of Sovereign (which had happened because of late payment for some goods and lack of satisfactory documentation); but said that TEL had a large stockpile of the brand so business should not be affected. He was also concerned to find a way of releasing the stocks that had been pledged by Gallaher to BLOM. The idea had been that as TEL profited from the supply of the 365 day goods it would generate the money to redeem those goods from pledge. TEL could not afford to provide replacement security and wanted Gallaher to provide it. Mr Rolfe was not keen on increasing Gallaher’s exposure.

The upshot was a proposal from Gallaher in a letter of 12^th November 2002. Gallaher would lend TEL $ 1 million, secured on Mr Tlais’ personal guarantee, so that TEL could free up access to the pledged stocks. In return TEL would pay an extra $ 10 a case on Sovereign up to a maximum 100,000 cases, any outstanding balance on the advance being repayable by 31^st May 2004. TEL would take responsibility for storing and selling the Gallaher Old Stocks, and, if necessary, their destruction; would use its best efforts to sell them in such a way as not to prejudice existing markets; and would account to Gallaher for the proceeds at a minimum price of $ 20 a case (unless otherwise agreed) and would receive a commission of $ 5 per case. TEL would inform Gallaher of the destinations to which the goods were shipped in accordance with the terms of the agreement with HMCE.

The variation, put forward (as one of three proposals) by Mr Tlais in his letter of 18^th November 2002, was that, instead of TEL remitting the value realised on the sale of Gallaher’s stock less a commission of $ 5 per case, TEL would retain the sale price in full. The agreement reached is set out in Mr Jack’s letter of 26^th November 2002. TEL was to take over the Old Stocks in Cyprus and Dubai for free. TEL was to disclose the destination to which it dispatched these Old Stocks on the same terms as affected new supplies.

The Loan documentation and Mr Tlais’ guarantee were executed on 22^nd November 2002. The Loan was to be paid back in full by the $ 10 supplements. TEL took over the goods as from 1^st December 2002. Mr Tlais also provided a further $ 1 million from his own funds to satisfy the bank.

A stock analysis prepared by Mr Jack at around 26th November 2002 showed that 46,515 cases in Cyprus and 83,300 cases in Dubai were was still pledged to the bank (Footnote: ⁴⁴), although he noted his understanding that some 10,000 cases had been moved to other locations and released to customers. The agreement of 26^th November provided for these to be invoiced at $ 45 a case.

A further meeting took place at Weybridge on 11th December 2002 attended by Messrs Rolfe, Keevil and Jack and Messrs Tlais, Saveriades and Clarke. Mr Tlais said he had lost trust in Mr Fawaz who needed to build bridges with him (Mr Fawaz in turn felt that Mr Tlais had set up the meeting to bypass him because he thought he could get what he wanted more easily by dealing with Mr Rolfe and Mr Saad). Mr Jack reiterated the need, and Mr Tlais agreed to provide, monthly sales and stock reports, to include the Old Stocks as well as new shipments. Mr Tlais signed the Procedural Agreement. Mr Keevil emphasised its importance and the need to keep up the flow of supporting documentation.

In January 2003 HMCE notified Gallaher that they had in their possession documents which showed that TEL had in January supplied 3 containers of cigarettes to Alba V & C in Bulgaria, which was not a Territory, via Drilon Enterprises with an address in the Czech Republic. The cigarettes, which had not been seized, had been dispatched from Cyprus to Varna via Malta. Alba was said by HMCE to be a current customer of CT Tobacco (Footnote: ⁴⁵) which had previously supplied them with large quantities of Sovereign. HMCE expressed concern that Alba was a distributor of TEL and that neither Drilon nor Alba appeared on the TEL customer list.

Mr Rolfe and Mr Jeffery took this up with Mr Tlais who replied promptly on 13^th January. He complained that he was not receiving the quality of information that he had been promised, that the co-operation he had expected had not materialised and that it would take him much longer to resolve the major problems alone. Mr Tlais said that he was unaware of Alba V & C; that he had been working with Drilon for six months, as Gallaher knew from copies of letters from them that he had passed on (Mr Jack later confirmed that that was so); he had no continuing relationship with CT Tobacco (other than to be owed $ 5.5 million). Drilon had signed the ITP. Neither Drilon nor Alba had been on the list faxed to him on 12^th September of customers with whom he should not deal; nor mentioned in response to his letter of 17^th September asking for more information. The destination markets were as on the letters from Drilon of which Gallaher had copies and the goods supplied were marked for the final country of destination. He had now red carded Drilon.

Mr Tlais red carded Drilon by a letter of 14^th January 2003, in which he said that TEL would have no alternative other than formally to terminate the business relationship unless Drilon was able to provide clear documentary evidence that it was “not included in the transaction” i.e. the diversion.

On 17^th January Mr Jeffery replied. He indicated that “the key to all the current issues is the need to be able to demonstrate to Customs’ satisfaction that products are going to the intended destinations”. He said that further information would be needed about Drilon; expressed the belief that HMCE had provided whatever information was available “in real time”; and that it was “our joint responsibility to fully investigate as far as we can”. Gallaher had not had any information about Alba and Drilon earlier in the year of which it had not informed TEL.

On 20^th January 2003, Mr Jeffery wrote again to Mr Tlais, in anticipation of a meeting with HMCE planned for March, to set out the key areas that HMCE would want to review):

After the first reported seizures in October 2002, Mr Perks began auditing the shipping documentation that TEL had provided to Gallaher in order to see whether it evidenced the shipment of goods from intermediate ports to final destination markets. The audit reached a temporary impasse between 18^th November 2002 and January 2003 because of the non provision by TEL of bills of lading from intermediate ports (Footnote: ⁴⁶) and there was a suspension of sales which were later resumed. Mr Perks, Mr Rolfe and Mr Moxon were regularly pressing Mr Jack to obtain more documentation from TEL.

Mr Perks’ analysis of 4^th February 2003 was that, in respect of the period up to the end of November 2002, there was, at best, a 46% shortfall (about 1 billion sticks) between:

During the first three months of 2003 three important developments occurred:

Mr Keevil and Mr Jack were in Cyprus on 29^th and 30^th January 2003 and met with Mr Tlais. Mr Tlais referred to a number of ways in which he said that Gallaher had been unhelpful by not making decisions swiftly enough; his continuing concern about Sovereign due to the high level of illicit demand; and the need for a new portfolio of brands.

At a meeting in Cyprus on 30^th January 2003 Mr Tlais took Mr Keevil aside and, in the presence of Mr Saveriades, but in the absence of Mr Jack, told him that during the Namelex era, when sanctions were in force, he had obtained goods with an Arabic health warning (“the Arabic goods”) which were suitable only for the Iraqi market. He said that he had “done bad things in the past”. Mr Keevil was shocked, firstly because he regarded this news as being sprung on him without prior warning and secondly because it represented a volte face from what Mr Tlais had told him in April of the previous year, namely that he was not involved in smuggling.

On 5^th February 2003 Mr Keevil, who had by now spoken to Mr Jack, wrote to Mr Saveriades and Mr Tlais to tell them what he had been told by Mr Jack. That was that the 33,000 cases of Dorchester, i.e. the Arabic goods, which it was agreed should be destroyed, consisted, as to 21,000 cases, of goods sold to Mr Tlais by Namelex and as to 12,000 cases were part of the Old Stock in Cyprus/Dubai which had been sold to Mr Tlais by Gallaher at the nominal price of $ 1 per case. Mr Keevil proposed to credit TEL with $ 12,000. He also proposed to credit TEL with $ 45 per case for 29,565 cases that had been invoiced in that amount, (pursuant to the original arrangement for the Gallaher Old Stocks to be sold at what Schedule VI estimated would be $ 45 per case and the proceeds remitted to Gallaher) and to re-invoice them at $ 1 per case.

He also reported that Namelex had told Mr Jack that all 33,000 cases had been due to be sold to a Jordanian distributor with whom Mr Tlais had no commercial relationship. Further the Jordanian health warning had changed so that the only area in the Middle East where they could now be sold was Palestine, and because of their age the goods were unsaleable.

In a letter of 7^th February 2003 Mr Tlais explained that the 33,000 cases had been purchased by him from Gallaher by letter of credit drawn on two banks at an invoice price of $ 90 a case. The 12,000 cases referred to in the letter of 5^th February 2003 were Dorchester Lights and not part of the 33,000. After the beginning of the TEL era Mr Jack had asked him not to sell these goods. But the Dubai warehouse, where the goods were kept in bond, had been approached by a customer wanting to buy the whole quantity at about $ 110 a case – a high price. Mr Tlais explained in evidence that an investigative journalist, whom he believed to be associated with the CIA, had been making enquiries of the warehouse. In his letter he expressed a desire to sell the goods “if the sale of these goods is not a matter for you”.

Mr Keevil, who consulted Mr Northridge, told Mr Tlais to destroy the Arabic goods. Eventually an agreement was reached – recorded in Gallaher’s letter of 2^nd April 2003 that Gallaher would reimburse TEL for the net price (after rebates) that had been received by Gallaher and 50% of the costs of destruction, but not the storage costs, such payment to be in the form of free goods, which, as Gallaher later confirmed were to be supplied during 2004. As a result of this episode Mr Keevil was left with real concerns as to Mr Tlais’ intention to develop legitimate business.

On 3^rd February 2003 Mr Tlais reported that there were some 800 cases of Iranian bound Dorchester in Dubai in which individual packs, but not the outer, had randomly changed to a green colour. Two weeks later, on 17^th February 2003, Mr Clarke was reporting that TEL’s Iranian distributor in Iran was withholding $ 10 million (the equivalent of more than 130,000 cases) (Footnote: ⁴⁸).

There is an issue between the parties as to who was legally responsible for the damage to the stock. At the time Mr Tlais took the stance that it was up to Gallaher, as manufacturer to decide what should be done with it and that he would comply with their instructions and at their risk. I address this question in paragraphs 1042-1061 below.

After his February 2003 audit Mr Perks sought further documentation relating to shipments from Dubai to Iran, and Mr Jack was instructed to seek to secure it. Further documentation in Farsi dealing with clearance and duty payments was brought back by him from Iran. These documents did not improve the position. There remained no evidence that any Sovereign cigarettes had been received in Iran despite the fact that 451 million sticks had been shipped for that market. The documents that were produced (e.g. stock movement records, banderol or duty receipts and internal bills of lading), whose quality was poor, did not, on their face, correlate to each other and some of them, such as documents recording payment to the Iranian Ministry of Economic and Financial Affairs, did not, in many cases, even show that they related to cigarettes. It was impossible in respect of any one consignment to track the goods from Dubai to the local Iranian distributor.

On 15^th April 2003 Mr Perks reported:

In June 2003 Mr Perks made a further attempt to reconcile TEL’s documents with Gallaher’s supplies. As a result he identified further problems with the documentation provided. In particular:

Mr Perks’ conclusion, expressed in an e-mail of 13^th June 2003, was that there was, in respect of the period from May 2002 to date, a shortfall (i.e. a percentage of sales not matched by documents showing shipment to final destination) in the range of 20-36% (depending on brand and flavour). There was much debate between Mr Perks and Mr Jack about how great the shortfall really was.

By 8^th July Mr Perkins had produced an analysis of the TEL documentation which showed that there was an overall 23% shortfall in documentation of 516 million cigarettes all or most of which appeared to consist of documents relating to:

This analysis was qualified by the observation that some of the documentation had credibility issues such as those referred to in paragraph 376. On 9^th July Mr Rolfe and Mr Perks agreed the 516 million and 23% figures.

These figures were later set out in a GRA Report on Product Shipment of 18^th July 2003, which referred to the poor quality of much of the documentation and the apparent forgery of one of the exit certificates. Mr Perks was not commissioned to perform a further audit after this.

Mr Jack wrote to Mr Tlais on 21^st July, after a visit to Cyprus, saying that the sales documentation was broadly in order (which is not how Mr Perks would have described it) but recording that “for the future we sought to tighten up a few areas”. He set these out in another letter of 21^st July 2003, and again on 28^th August 2003, setting out ways in which the provision of documentation needed to be improved. The faults identified included (a) the provision of a customs duty report or an UAE exit certificate, but not both; (b) the absence of bills of lading to accompany customs documents; (c) a bill of lading which was in fact a carbon copy; (d) bills of lading and other documentation not detailing the brands and quantities; (e) one instance of two letters on different letterheads with the same signature – one on the letterhead of the customer and one on that of the freight forwarder.

The absence of a complete set of documents, including bill of lading, customs bill, and exit certificate meant that, in some cases, the container number and/or the brand was not apparent. Ordinarily the container would be on the bill of lading and the exit certificate and the brand often appeared on the exit certificate, if not on the bill of lading. There are some examples of two copies of the same bills of lading with different types of cigarettes specified in manuscript.

Gallaher made further reference to the documents outstanding from Hazem. Mr Rolfe’s letter of 23^rd June 2003 referred to the documents that Hazem had promised to Norman Jack in Iran and stated that if Mr Clarke “can bring these back from his forthcoming trip, that will greatly improve the situation”. Mr Jack’s subsequent letter to Mr Tlais of 21^st July 2003 records an understanding that “we await resolution of matters in Iran to secure the outstanding documents from there”. Mr Fawaz’s letter to Mr Tlais of 1^st October 2003 records, as one of three housekeeping points, that the missing documents from Hazem are to be provided, that Hazem’s position was unacceptable and that this should be communicated to him, and that the documents “must be supplied” by the time of Mr Jack’s visit to Iran due to take place on 12^th October.

On 18^th July 2003 Mr Jack sent Mr Tlais copies of the two forged exit certificates that TEL had provided to Gallaher - see paragraph 376 (i) above - and explained why they appeared to look similar. Mr Jack indicated that these were documents about which Gallaher had “some doubts”. In fact Mr Perks had no doubt that they were forgeries. Mr Jack reported that Mr Tlais’ initial response was “incredulity and denial”, and that he accepted that Gallaher’s suspicions were well founded and had “advised his representative [Adam Trading] to make vigorous inquiries in his office as to who might have done this”. On 22^nd July Mr Jack reported that Mr Tlais accepted that there had been “an alteration”, was launching an investigation at Adam Trading and was a comfortable as he can be that his agent himself was not involved given the crude nature of the transaction.

In October 2003 Mr Tlais reported to Mr Jack that he and Dr Al-Mahamid had to accept that there had been falsification of the documents. Dr Al-Mahamid had concluded that a junior member of staff, under pressure to produce the necessary documentation, had produced a crude forgery in order to shortcut the system. The member of staff had been told that such action was not acceptable.

Mr Tlais’ evidence to me was puzzlingly different:

“What he said, Khaled, is that this document, it is not belong to him, it is something belong to his brother. I do not remember exactly the story, how it happened. I told him Khaled, are you sure about it? He said, yes, I am sure, I have no involvement with these things.”

On 16^th and 17^th June Messrs Rolfe, Fawaz and Jack visited Lebanon where they met Messrs Tlais, Saveriades and Clarke. On 23^rd June Mr Rolfe wrote summarising the matters that had been discussed. These included:

Mr Fawaz again regarded the trip as stage-managed by TEL. Gallaher’s representatives had been taken to 12-15 outlets where there was some Dorchester and Sovereign, but when he visited other outlets on his own there was nothing there. Furthermore, following the meeting with the Régie, the General Manager had spoken to him by telephone, and expressed surprise at Gallaher’s choice of distributor. He felt that Mr Tlais was unprofessional, and his choice of Virginia brands a mistake as the market was predominantly American blend.

On 30^th July Mr Keevil and Mr Jack met Mr Tlais and Mr Clarke at the Langham Hilton. This was in part to discuss the meeting with HMCE the next day, and in part to explore the possibility of revising the commercial arrangements between Gallaher and TEL, on which Mr Saad and Mr Fawaz had been working.

The meeting with HMCE on 31^st July was attended by Mr Keevil, Mr Jeffery and Mr Jack on behalf of Gallaher, Mr Tlais on behalf of TEL, and Mr McCallum on behalf of HMCE. Once again, HMCE did not permit Mr Clarke to attend. There was a general discussion on the progress apparently being made by TEL in building legitimate business, and the levels of seizures of Sovereign. Mr Jack made a presentation on behalf of TEL, from a speaking note which was handed to the Customs at the meeting. I am satisfied that this approach had been agreed the previous day because Mr Tlais was uncomfortable presenting in English – as Mr Tlais himself explained to the HMCE officers – and was not an attempt by Gallaher to gag him.

Mr Jack’s notes show that he presented matters in as favourable a light as possible. They record that “Mr Tlais has exercised due diligence over customer selection to our satisfaction”; and that he “ensures all his customers are fully conversant with the provisions of our policy and, to the extent he enters into written agreements with them reflects its terms” (Footnote: ⁵⁰); and “the red and yellow card system has demonstrably been implemented by Mr Tlais”; and his belief that the measures he described “have been effective since the incidence of seizure of TEL products are limited and, anecdotally I have heard that Sovereign is very difficult to secure on the open market nowadays”.

Mr Jack told HMCE, who had received a copy of Gallaher’s audit of the first year of operation under the TEL Agreement, that documents were not in Gallaher’s hands in respect of delivery to ultimate destination in respect of two customers, one who had been red carded by Mr Tlais (i.e. TSS – see paragraph 914 below) and in respect of a quantity of goods supplied for the Iranian market ex- warehouse Dubai for which the Iranian distributor (i.e. Hazem) was keeping the documents because he was in dispute with TEL.

Mr Jack also referred to a consignment of 24,800 cases of Sovereign, coded for Iran, which had been ordered in January and were to provide additional security to the bank in order to secure the release of old stock, about whose age the bank was concerned. These cases had been produced by Gallaher and shipped but due to a number of problems relating to the letter of credit, (which had to be replaced), for which TEL was not responsible, the documents were not presented until May. BLOM had insisted on having the goods surveyed and declined to accept them as security (Footnote: ⁵¹) due to the time that they had been in port as a result of which Mr Tlais wanted to order the same quantity again. Mr Tlais wanted to explore the possibility of selling the first consignment with a secondary code to be put on the packs for tracking and tracing purposes.

Reference was made to the fact that Sovereign continued to be high on the seizure list. This was represented as attributable to two main factors; (a) residual stocks supplied to Namelex and CT Tobacco remaining in the market and (b) a degree of sweeping up of product on account of the high demand from the transit segment. It was no longer necessary to suspend Sovereign production.

HMCE were told by Mr Tlais at the end of the meeting about the damaged

Mr Tlais agreed with Mr Rolfe that he would take the goods which the bank had rejected anyway and pay for them by cheque. In January 2004 he was to complain that customers were returning them due to their condition.

Mr Clarke’s evidence was that in late July or early August 2003 at dinner one night Mr Fawaz asked for TEL’s help in removing Mr Jack from the business and said that in return he would assist Mr Tlais obtain regular supplies of Sovereign. Mr Fawaz denied that any such conversation took place. I am not satisfied that a conversation in those terms took place. It seems to me implausible that Mr Fawaz would think that he could obtain such assistance from TEL or that he would see the need to seek it. I accept Mr Fawaz’s evidence that he had a discussion with Mr Clarke in which he pointed out that not all decisions were taken by Mr Jack, and that decisions within Gallaher were usually taken by consultation and as a team and that in the end Mr Jack had to defer to Mr Fawaz himself or to Mr Rolfe. I also do not accept that Mr Fawaz said that Mr Saad, who was his superior, was “my man” in the sense that he could exercise control over him.

After his discovery that Mr Tlais had been involved in selling goods into Iraq in breach of sanctions Mr Keevil began to have doubts about Mr Tlais’ desire to develop a legitimate business. He came to take the view that the best long term solution would be to renegotiate the arrangements made with Tlais in such a way as to give Gallaher direct responsibility for the control and management of the brands, whilst utilising Mr Tlais’ contacts to develop the business.

In June 2003 Mr Fawaz put forward a presentation for changing the relationship between Gallaher and TEL. Under “Current Key Issues” he noted:

“• Lack of distribution expertise and infrastructures by sub-distributors

• Lack of disciplines in the areas of stock control / inventory management

• Current activities based on limited market know-how

• Gallaher / customs requirements re corporate governance

…

• Lack of Supply Chain fundamentals”

He proposed a new Business Model involving the following headline points “Change from a trading to a strategic platform”, “Agree a commission format for [TEL] for the whole of Gallaher portfolio across Tlais Contract markets”; “Sell direct to national distributors – one per country” with a “Hands-on Modus operandi” including “Tight management of sales, stocks and credit for all customers”. These proposals were to be discussed at a meeting with Mr Tlais in Lebanon in August 2003. In an e-mail to Mr Saad and Mr Rolfe of 24^th June Mr Fawaz envisaged that Mr Tlais would cease to have an active role in the business and would not hold stock, but would retain a consultancy role and be involved in strategic decisions, and would be paid a commission on all sales to the Territories, for the period of the original contract. In an e-mail to them of 26^th June he expressed the view that TEL “have no potential whatsoever as a distributor and have been proven to have no expertise in the area of distribution” and, whilst proposing TEL as sole distributor for Lebanon and Syria and a sharing of net profits on the Gallaher portfolio, which was to include new brands, he provided for other distributors in all other Middle Eastern markets.

On the evening of 18^th August Messrs Rolfe, Keevil, Saad, Fawaz, and Jack had dinner with Messrs Tlais, Saveriades, and Clarke and Abu Ahmed, Mr Tlais’ secretary and other Tlais family members.

On 19^th August Mr Jack began the meeting with a substantial presentation of Gallaher’s plans for the AMELA region. At some stage a blazing row began in Arabic between Mr Saad and Mr Fawaz on the one hand and Mr Tlais and his brother on the other about who should have control over distribution. Mr Saad referred to Mr Tlais as wanting to strip Gallaher naked. Mr Fawaz probably used a coarser expression. In the end the argument subsided. Mr Keevil concluded that, in the light of the hostility displayed, neither Mr Saad nor Mr Fawaz could any longer be responsible for managing TEL.

Before the Gallaher party left Lebanon Mr Fawaz told Mr Saad that on the evening (as Mr Saad understood) of Tuesday 19^th Mr Tlais’ brother had threatened him and Mr Saad on the telephone (“It is us or you”). He had said that the Tlais family would deal with them if they hurt their interests; harm them, if they harmed the Tlais (i.e. members of the Tlais family); and that there would be no limits to what they were prepared to do to “you and yours”. I think that something to that effect was said, but probably on 20^th August.

Mr Clarke’s evidence was that at about lunchtime on 20^th August, when he and Abu Ahmed were in Tripoli Abu Ahmed made quite a long call in Arabic on a mobile telephone to Mr Fawaz, who was probably in Beirut. This involved a lot of shouting. The conversation took place because Mr Tlais and his brother had learnt that Mr Fawaz had asked for a copy of the TEL Agreement and thought that Mr Fawaz was trying to terminate it. After he learnt of the call Mr Saad hired some security to protect him and his family. A few days after the incident Mr Tlais called Mr Rolfe and said that neither he nor his brother had meant to threaten any physical harm.

Mr Griffiths of Gallaher carried out an investigation and made a report on what had happened. He was told, I assume by Mr Fawaz, that the threat to Mr Fawaz and Mr Saad had occurred at lunchtime on 20^th August in an hour long telephone conversation; and that Mr Fawaz thought that Abu Ahmed had spoken in the heat of the moment. Mr Fawaz went out to dinner with Mr Tlais and his brother the same evening and matters appear to have been amicably resolved.

Whatever happened in Lebanon between 18^th and 20^th August, on 25^th August Mr Tlais wrote Mr Rolfe a warm letter of thanks, and described the plan presented as “clearly very well thought out and extremely professional in its content”. He looked forward to receiving the revised set of budgets showing how the plan could deliver the level of profit which Mr Saad had suggested. As a result Mr Fawaz travelled to Cyprus on 8^th September 2003 for discussions with Messrs Tlais and Clarke.

After this meeting Messrs Rolfe and Keevil decided that a substantial TEL order for Sovereign to be supplied for Iraq, Iran, Yemen and Syria, should not be fulfilled until at least the following issues had been resolved:

On 18^th September Mr Fawaz visited TEL in Cyprus for a further meeting to explain these requirements and others. A meeting between Mr Fawaz, Mr Tlais, and Mr Clarke was secretly recorded by TEL. A 30 minute tape was disclosed in July 2006. This was a section of a much longer tape which was only provided in April 2007 following an “unless” order. According to Mr Clarke the failure to provide the full tape was because he could not remember where it was. I found this explanation unconvincing. Much of the transcript of the tape is difficult to follow but parts of it confirm Mr Fawaz’ evidence that, on this, as on other occasions, there was discussion about the withdrawal of Sovereign in which Mr Tlais made reference to various different sums that he needed to have covered if Sovereign was to go, his principal concern being to ensure that he was put in a position where he could pay off the bank – for which he said he needed something in the order of $ 30 million.

In a fax of 1^st October 2003 Mr Fawaz set out what he understood to be an agreement reached in principle at the meeting in September 2003 as to the fulfilment of Gallaher’s requirements if it was to continue shipping product:

On 3^rd October 2003 Mr Tlais wrote to Mr Fawaz. He did not deal with the requirements that Mr Fawaz had outlined, saying that no formal agreement had been reached and that he had requested a formal meeting with Mr Rolfe to finalise a way forward for both parties. His letter of 2^nd October to Mr Rolfe had asked for a formal meeting, to be attended by Messrs Northridge, Rolfe and Keevil only, to produce “clear decisions from your side as to our future”. Mr Rolfe agreed that such a meeting should take place but asked for a detailed response to Mr Fawaz’s fax of 1^st October in advance. This did not come.

Mr Fawaz viewed what he regarded as Mr Tlais’ attempt to exclude him and Mr Saad from the meeting as indicating a wish to avoid making the new arrangements work; and Mr Tlais’ overriding objective as the retention of Sovereign; and that the more Gallaher gave, the more Mr Tlais would demand. He favoured exploring the termination route.

In November 2003 Mr Tlais telephoned Mr Keevil said that he had secretly recorded meetings with Mr Fawaz, in audio and video, in which Mr Fawaz had made improper suggestions as to the conduct of future business¸ involving a suggestion that Mr Tlais and Mr Fawaz should work together against Gallaher’s interests. Any such recordings have not been produced.

Mr Tlais’ meeting with senior management eventually took place on 8^th December 2003 in Weybridge. On 20^th November 2003 Mr Fawaz sent Mr Keevil an e-mail in which he complained of the exclusion of him and Mr Saad from the discussion, complained that the Tlais affair was being badly managed, and referred to a

“reluctance to acknowledge that [TEL] is a DNP reexporter, primarily to the UK, not a distributor. Their interest lies in continuing to receive stocks for reexports and credit for goods already received”.

By the time of the meeting the increasing level of seizures of goods supplied to TEL underscored the need for some change of arrangement which would give Gallaher more control. The problems with production of adequate documentation and up to date sales and stock reports (about which Mr Jack had corresponded with Mr Tlais on 22^nd September and 4^th December) had continued, although a stock report in a letter faxed on 3^rd December 2003 was received by Mr Jack after he had written, but not dispatched, his letter of 4^th December.

At the meeting Mr Tlais made an attack on Mr Fawaz, whom he said was trying to damage his relationship with Gallaher. He referred again to recorded conversations with him after the row in Beirut in August. He claimed to have stock levels of 190,000 cases of various different brands with a further 24,800 cases about to arrive. By the end of January the stock would be mainly Dorchester. The main Sovereign markets were Iran, Afghanistan, Pakistan and Yemen. Direct shipment could not begin because it was still necessary to mix Lights from the Old Stocks with the full flavour ones in order to sell them. By this time Dorchester intended for Libya, one of TEL’s territories, had started arriving in Nigeria, which was not a TEL territory and was an important market for Gallaher. TEL had been shipping goods for Libya to Cotonou in Benin, for overland transport via Niger and the Sahara to southern Libya. Mr Tlais blamed the diversion on spotting.

The Cotonou – Niger/Chad – Sahara Desert to Libya route is the so called “tribal route”, which was, according to Mr Jack, an established “semi-legitimate” route by which it was possible to sell to tribes that supported Colonel Gaddafi. That is what he assured Mr Rolfe and Mr Fielden. TEL produced evidence to Gallaher of shipment by Adam Trading to Cotonou without any demur from Gallaher.

It was agreed that Mr Jack and Mr Clarke would meet in January 2004 to agree a new draft business plan, intended to cover the next 3 years, providing for transition to direct to market sales as soon as possible.

The upshot of the 8^th December meeting was to confirm Gallaher in its view that it was necessary to change the business structure and that the relationship between Mr Fawaz and Mr Fawaz had irretrievably broken down. In January 2004 Mr Fawaz was removed from the reporting line to concentrate on Africa and Latin America; Mr Jack was thereafter to report directly to Mr Rolfe and to have day to day responsibility for the Middle East.

Mr Jack and Mr Clarke met early in January 2004 to discuss a detailed business plan for 2004-6 a draft of which Mr Jack circulated within Gallaher. It included a number of proposed control measures. The draft was not acceptable to Gallaher for a number of reasons including:

Mr Hainsworth, a man with forthright opinions but no previous relationship with TEL, had been responsible for Gallaher’s business in the CIS, and was based in Moscow. On 5^th April 2004 he took over responsibility for the AMELA region (Footnote: ⁵²). He was somewhat reluctant to do so. Mr Rolfe asked Mr Hainsworth to review the plan. Mr Northridge, at whose insistence he had agreed to take up the position, told him to have a look at the proposed plan to see whether it was any good and then reformulate how Gallaher could do business in the region.

Mr Hainsworth’s comments on the plan were scathing. He described it to Mr Perks as “truly the worst sales plan I have seen in my life”, involving Gallaher “selling product to Iran at NEGATIVE contribution while Tlais make a guaranteed 8% and the importer (normally a Tlais subsidiary) makes 20%”. He pointed out in an e-mail to Mr Perks, Mr Rolfe and Mr Keevil, that the P/L information showed that Gallaher were selling at negative margins before marketing; and that the idea of brand launches of Sobranie Classic (“only worked in Kaz”) and a “completely unknown” Gallaher Red were laughable. He noted “I do not see any economic argument to continue Sovereign Classic sales, especially as it is evidently impossible to track, it exposes the company to great legal risks in the EU, far beyond any debt owed or potential contractual dispute”. He also noted that the proposal involved “selling to some countries that are very difficult if not impossible legally due to monopoly status like Egypt and Libya! You have to question where the real intended location is”. He was critical of the lack of reference to the sales mix and the absence of a brand strategy (i.e. an analysis of what segment was being aimed at, what were the unique selling points etc). He was also critical of the continued use of marginal costing for certain new markets, and what he saw as a failure to provide for proper marketing and brand support.

Mr Hainsworth asked Mr Jack to revise his calculations and prepare an adjusted plan with substantially less Sovereign, a reduced number of countries, a lower number of brand and SKU (stock keeping unit) launches and an assumption of manufacture in Poland rather than the UK.

Mr Hainsworth’s view was that Gallaher should extricate itself from its involvement with Tlais, that Mr Jack and Mr Fawaz should take no future part in the AMELA business and that Sovereign Classic business should cease because it was a transit band. He thought that some form of settlement would be the best solution because of the breakdown of trust that had occurred between Mr Tlais and Mr Fawaz.

From this time onwards Mr Hainsworth dealt with plans for the future and Mr Rolfe and Mr Keevil were responsible for dealing with the problems from the past.

On 28^th January 2004 Messrs Jeffery and Jack met HMCE (Mike Barrett). HMCE reported that for the current fiscal year Sovereign represented the most seized brand of non-counterfeit cigarettes. Of the seizures in excess of 500,000 sticks, Sovereign cigarettes supplied to TEL represented 22 million; those supplied to Namelex (and possibly, therefore, part of the Old Stocks) 7 million. 14 million Russian Sovereign packs (not supplied to Namelex or TEL) had also been seized.

On 4^th March Mr Jeffery and Mr Keevil met Mr Byrne and Mr Wells for their normal six monthly review. HMCE reported its concern that Sovereign was likely to be the most seized of all brands in the UK in 2003-4 as it had been in 2002-3. Namelex seizures appeared to be on the decline but seizures of Sovereign sales to TEL coded for Iran, Yemen and Sudan were on the increase. The fact that seizures were not limited to goods supplied to one country suggested to HMCE either a widespread problem amongst TEL’s distributors and lack of due diligence on the part of TEL or TEL involvement.

HMCE felt that the use of global English health warnings increased the risk of diversion. It referred to the fact that Gallaher was the first company to sign an MOU; and indicated that, were it not for that relationship and the steps that Gallaher had taken to control the business, HMCE might already have taken a more aggressive approach. Matters were left on the basis that if Gallaher wished to avoid a red card being issued (either against the whole business or in respect of sales of Sovereign to Tlais) immediate action need to be taken to stop Sovereign sales to Tlais and to use local health warnings in future. HMCE recognised that some time would be needed to discuss things with Mr Tlais. It was agreed that Gallaher would report back by the end of May. Customs would stop short of issuing a red card meanwhile against Gallaher’s undertaking to accept no new orders for Sovereign pending discussions with TEL and Gallaher reporting back to HMCE.

On 11^th March Mr Jack notified Mr Tlais that Gallaher would accept no new orders for Sovereign pending a review and further discussion.

On 24^th March Mr Wells of HMCE wrote to Mr Jeffery stating that HMCE would want to assess the efficacy of the measures taken (the removal of Sovereign and the use of local only health warnings) and to discuss the impact on seizures in about two months.

On 24^th and 25^th March Messrs Keevil and Jack met TEL in Cyprus. The meeting began with a litany of complaints against Mr Fawaz. Mr Tlais maintained that it would take two years to phase in any replacement for Sovereign. He wanted a further 1 billion sticks to enable him to collect outstanding receivables and honour commitments. Mr Tlais and Mr Clarke said that TEL had debts of over $ 40 million and stocks worth about $ 8 million. Mr Keevil and Mr Jack then proposed an arrangement (which they said would require Board and HMCE approval) whereby TEL should become an agency (not a distributorship). This was put forward as a means of meeting HMCE’s concerns and as something that might well also permit a continuation of sales of Sovereign, which would be largely under Gallaher’s control. Mr Tlais agreed that Gallaher should develop this proposal as a way forward, whilst expressing the need for money outstanding from the destruction process, i.e. compensation in relation to the destruction of the Arabic goods, to be given to him: see his letter of 7^th April.

By the end of April Mr Jack had compiled, in consultation with Mr Clarke, a further planning document entitled ‘Tlais Enterprises – Proposed Structural Revisions’. It included forecasts of 4.5 billion sales in 2005 (Footnote: ⁵³) generating $ 13.3 million net margin for Gallaher (before advertising and selling costs) and $ 6.9 million of commission for Tlais. It also proposed an income guarantee of $ 5,000,000 for 10 years (Footnote: ⁵⁴), upon the footing that the agency agreement would greatly reduce TEL’s earning potential. Mr Rolfe thought that the volumes looked highly optimistic and the size of the commission unworkable. He asked for Mr Hainsworth’s views.

Mr Hainsworth was unimpressed. In particular he objected to (a) the excessive quantity of Sovereign which Mr Jack envisaged TEL selling – 42% of sales compared with 55% in the January plan; (b) the fact that the expected sales of Dorchester were not supported by any research or backing in terms of size of market; (c) the inclusion in the plan of sales to countries such as Libya and Egypt where legitimate importation could only take place through the existing monopolies; (d) what he regarded as unrealistic expectations of sales of Sobranie. If, as he suggested, sales of Sovereign and sales to Libya and Egypt were removed, Dorchester and Sobranie expectations were reduced, and marketing costs taken into account, there was no resultant profit.

He was also concerned that under the plan Gallaher would make direct deliveries so that TEL could disclaim responsibility to HMCE and would not be subject to red carding but would retain a degree of control of what the distributors did - so that Gallaher might be at greater risk than before.

Mr Hainsworth revised these calculations further. In one version he removed all Sovereign sales on the ground that it was no longer appropriate to supply the brand, reduced the Dorchester level to one that he regarded as more in keeping with a Virginia cigarette, removed all sales to countries where importation to the domestic market was in practice impossible and altered the targets for Sobranie. This produced a total of about $ 2 million gross profit with $ 750,000 commission for Mr Tlais. But to do that would, he estimated, require $ 2 million in marketing costs. So in the first year there would be no profit at all. An alternative calculation which involved focusing on Iran, Iraq and Lebanon, would produce profits of less than $ 450,000 after deduction of marketing costs of $ 1 million and before deduction of TEL commission.

Mr Hainsworth’s instructions from Mr Northridge around this time were that he was to take a fresh perspective on the business and to use his best endeavours to try to make matters work.

On 28^th May 2004 Mr Keevil and Mr Jack met Mr Byrne, Mr Wells and another HMCE representative. In advance of the meeting Mr Jack had sent to Mr McCallum a list of the sanctions that TEL had applied to its customers such as red carding TSS, putting supplies to Drilon on hold, and ceasing to deal with certain distributors etc. Mr Keevil had written to HMCE in advance identifying as areas for discussion (i) TEL’s perspective on the Sovereign issue and the importance to it of continued supply; (ii) HMCE’s attitude to a “run off” period if Sovereign were removed from the brand mix; (iii) HMCE’s attitude to Gallaher supplying Sovereign to distributors direct in the current TEL territories if TEL became an agent.

Mr Byrne did all the talking. He left Gallaher in no doubt that HMCE regarded the level of seizure of Sovereign in the UK as very serious. Between April 2003 and March 2004 Sovereign accounted for 56% of all seizures (in excess of 500,000 cigarettes) of genuine product. Between January and April 2004 it accounted for 65%. HMCE’s concern was increasing and the trend was damaging UK revenue. He said that this conversation with HMCE was to be taken as a second serious warning. HMCE was being pressured from several quarters. Comments about whether Gallaher was genuinely committed to its MOU had been made by the Treasury and the Public Accounts Committee. Gallaher was invited to sort the position out and meet again in 2-3 months. It was made plain that any decision to be taken was a commercial matter for Gallaher to decide. HMCE also expressed concern at the level of stocks that TEL had; and expressed the view that, if Sovereign was removed, it did not want to see the position repeat itself with Dorchester.

In the light of that meeting Gallaher decided to delete Sovereign from the brands available to TEL under the TEL Agreement. On 8^th June Mr Keevil informed TEL, and HMCE of this decision, which was expressed as an exercise of Gallaher’s entitlement under clause 6 (ii) of the TEL Agreement. Gallaher proposed Gold Bond as a replacement brand. Gold Bond was not widely known outside the Middle East and Africa; and therefore presented a lesser risk of smuggling.

Mr Jack met Mr Tlais shortly thereafter. The upshot of their discussions was a recommendation from Mr Jack that, instead of amending the TEL Agreement to substitute Gold Bond for Sovereign, and in recognition of the pressures on TEL’s business as a result of the withdrawal of Sovereign, TEL should become an agent, with a $ 5 million a year profit guaranteed for three years. This proposal was contained in a document, favourable to TEL, entitled “TEL Response to Gallaher Proposal in Respect of Gold Bond and his detailed Counter Proposals”. In the course of the document Mr Jack expressed the view that in considering whether the Sovereign seizures represented a lack of control and a matter of concern going forward consideration must be given to the fact that Mr Tlais had continually pressed for a replacement; had been open about the fact that complete control over Sovereign was not possible because of the demand for it by smugglers against which background he suggested that seizures were “minor” in the context of the volume shipped.

This was not acceptable to Gallaher, not least because of the demands that it might generate from other distributors. Gallaher offered – by Mr Jack’s letter of 15^th June – to add LD (an American blend) as a brand, in addition to Gold Bond. LD is Gallaher’s biggest seller by volume.

Mr Tlais’ response was to write, on 16^th June 2004, to Mr Northridge. He referred to the fact that he had been asking for a replacement for Sovereign since the beginning of the relationship; accepted that Gold Bond and LD had a good future with time and investment; but said that Gallaher had put him in a position where he had neither the time nor the resources to build these brands. He claimed that all of the mistakes of the previous two years in relation to Sovereign were down to Gallaher and not him and that he was not prepared to pay the price for them. He referred to:

“specific problems involving Gallaher staff who were encouraging the smuggling of the brand and making sales behind my back to my own customer and to individuals who were fronting for people who were on the customs blacklist”, and to

“many other things that have come to light that you may or may not be aware of and before we go down a road from which we cannot return I believe it is my duty to inform you fully of everything that has taken place…”

In an e-mail of 20^th June 2004 to Mr Rolfe Mr Hainsworth recorded that it seemed that “we are not going or unable to close the Tlais contract”. He asked to take over full control of the contract negotiations and pay Mr Tlais an agency fee. Mr Rolfe agreed that he should.

In the same e-mail Mr Hainsworth expressed his view of Mr Jack:

“We need to urgently draw the line with Norman who is loose cannon at best. He is not reporting to me or anyone else by the way he is operating.”

In September Mr Jack was seconded to Gallaher’s group security and brand protection team.

A meeting was arranged for 23^rd June in Weybridge. In a letter of 18^th June to Mr Keevil, who had written to him the previous day to set out certain key points, Mr Tlais claimed that Sovereign produced a profit of $9 million during the first trading year. He also complained about Mr Fawaz (“I am still living with his legacy and am paying the price daily for your errors in judgment”). In respect of his contention that Sovereign should have been withdrawn sooner coupled with a continued desire for Sovereign, he observed:

“It is true that the new business plan produced by Mike and Norman in January contained significant quantities of Sovereign, but I would point out that Stateline had been withdrawn, Dorchester was building back year on year as the market cleared through the damaged product. Without any new brands available to Tlais what do you expect? As I have to produce a minimum of $5 million a year to survive.”

The meeting was attended by Messrs Northridge, Rolfe, Keevil, and Jack for Gallaher and Messrs Tlais, Clarke and Saveriades for TEL. Mr Northridge said that HMCE’s concerns about Sovereign were now such that continuation of the brand was impossible. Mr Tlais spent considerable time expressing the several dissatisfactions that he had expressed in the past. He said that he had with him a lawyer representing Dr Al-Mahamid who was planning legal action against him as a result of the removal of Sovereign and other matters. The lawyer would remain in London awaiting advice on the settlement of matters with Gallaher.

Mr Rolfe outlined Gallaher’s offer (as an alternative to continuing with the existing distribution agreement) which Mr Jack later set out in a letter of 25^th June. It involved:

On 24^th June Mr Tlais told Mr Jack that he could accept $5 million per year in years 1 and 2 and $ 2.5 million in year 3; on the basis that his bank, who had not received anything for the last five months, required him to provide $ 15 million over three years. On 7^th July Mr Rolfe told him that before Gallaher could commit to that proposal or make any counter-proposal it would be necessary to resolve the stock destruction claims and estimate the likely level of sales and profits under any agency arrangement.

TEL contends that certain key individuals at Gallaher were intent on extracting Gallaher from the TEL Agreement; and that the negotiations in 2004 to replace the TEL Agreement were conducted in bad faith and broke down because those individuals had taken against TEL and not, as HMCE were told, because of concerns about TEL’s control of goods.

There is no doubt that Mr Fawaz had a very low opinion of Mr Tlais and would have been glad to see the back of him. An AMELA plan drawn up at the end of 2002 by Mr Fawaz and Mr Saad expressed a need to negotiate an immediate exit from the TEL Agreement. Mr Fawaz was not concerned in the negotiations for a new agreement in 2004.

In June 2003 Mr Northridge had indicated that he wanted a presentation to the Board to consider the current strategy and options for AMELA including “Tlais exit, cooperation, or our own organic business” although “Tlais exit” does not seem to have been given much serious consideration. In October 2003 Mr Fawaz had recommended further exploration of the termination option: see paragraph 411 above. At an Audit Committee meeting of Gallaher Group Plc on 4^th December 2003 the Committee noted that management aimed to review matters in 2004 to consider “whether exit opportunities existed”.

Mr Hainsworth was not impressed with Mr Tlais either and thought that Gallaher should seek to extricate itself from the TEL Agreement: see paragraphs 420-424 above. In his e-mail of 20^th February 2004 to Mr Perks he said “I am not going to let this drop. There would be no Tlais and no Norman and no Sovereign Classic business, otherwise they can get someone else to do the job”. He thought that Mr Keevil and Mr Rolfe were “all on the same page” as him.

In those circumstances, and in the light of the difficulties that Gallaher was having in its relationship with TEL, the possibility of Gallaher buying out the TEL Agreement or terminating it was, from at least the middle of 2004, in Gallaher’s collective mind. When Mr Hainsworth sounded Mr Jack out on the former the numbers suggested were too large. Mr Tlais was prepared to be bought out if his liability to the bank was covered.

The fact that Mr Hainsworth held the views that he did does not mean that Gallaher was acting in bad faith or failed to negotiate. His evidence, which I accept, was that in July his aim was “to avoid litigation, to allow Gallaher to make a profit where it had been making losses and of course to minimise the risk of our products being smuggled”.

By 23^rd July 2004 Heads of Agreement had been agreed, subject to contract. On that date there was a difficult meeting attended by Messrs Hainsworth, Rolfe, Keevil, Murden and Jack for Gallaher and Mr Tlais and Mr Clarke. At one point, when an impasse had been reached, Mr Hainsworth telephoned Mr Northridge who told him to try to do everything possible to reach a settlement which Gallaher could live with. Mr Northridge was aiming to achieve a settlement of all the issues: an arrangement for the future that would give Gallaher more control, the Old Stocks, the 365 day goods, Mr Tlais’ guarantee and destruction of the damaged Dorchester.

The Heads of Agreement proposed the termination of the TEL Agreement; its replacement with a new arrangement covering at least Iran, Iraq, Syria, Jordan and Lebanon with Dorchester, Gold Bond, LD and Ronson as brands. Key decisions were to be discussed jointly but final decisions on all advertising, pricing and selling matters, in addition to the structure of the portfolios for the territories, would lie with Gallaher. The actual agreement was to incorporate provisions to ensure that neither party should seek to impose unreasonable conditions upon the other. The goods for the new business would be produced in Poland. Indicative ex factory prices were $ 60 per case (Footnote: ⁵⁵). The business would be based initially on TEL’s existing distributors in respect of whom TEL would take the credit risk. New distributors would be determined jointly. Sales volumes would be commensurate with the duty paid demand in each of the specific markets, or, where specifically agreed, duty free outlets, and all sales would be in accordance with the ITP. TEL would be guaranteed minimum profits of $2.5 million for 2005 and 2006, any profit between $ 2.5 and $ 5 million would be for TEL, and any profits in excess of $ 5 million would be split equally.

Profit was to be defined as revenue less cost of sales and also less an indicative sales and marketing budget of $ 3 million per year. Mr Hainsworth considered that this figure, for a number of new brands i.e. Sobranie, Ronson and LD, to be launched across several territories, in addition to the marketing needed for Dorchester, was barely adequate.

Following the meeting Gallaher examined the production costs for making the brands that would be sold to TEL. TEL thought Gallaher could do better than $ 60 per case. Mr Hainsworth believed that, once the details were gone into, it would become apparent, and TEL would realise, that the volumes needed to make the business profitable would be very difficult to achieve if TEL was to comply with the ITP. Mr Jack seemed to believe that huge volumes were achievable.

On 29^th July Mr Hainsworth reported to Messrs Keevil and Rolfe:

“You are aware that at the price of $60 per case for Dorchester, LD, Ronson and Gold Bond we effectively make nothing after all our costs.

If they sell at $70 which I guess is the most likely price for Iraq, then they would have to sell 3BN a year to cover the marketing costs ($3m).

To reach the min guaranteed profit he would have to sell another 2.5BN.

This is highly unlikely, with the exception of Dorchester which has had spotted success, these brands are new to the market and I do not think they have the infrastructure to handle such business. I could only conclude they intend to concentrate on non-Duty paid transit markets which is why Dorchester / Ronson may be a major problem for Gallaher. I did change the design of the LD to ensure that CIS is reduced risk.

I hope by conclusion that Tlais will realise that he is unable to make this work within the terms of the Int Trading Policy.

I also note that the sales of Sobranie Family are highly subjective and for reference if we sell 100m in Israel in one year I would consider this a good result.

I also seriously doubt that Tlais has the banking issues that he makes out, although they are his issues he seems to use them as a leverage against Gallaher”.

Mr Rolfe responded:

“I agree that it looks difficult to make a business case to deliver his supposed $ 5m+ per annum requirement from the cost and overhead that we have indicated to him, and that does lead to suspicions that he is looking to focus on duty-free activity. I think our approach should be to be seen to be working cooperatively to develop the business options (to continue to make it difficult for him to fallback to a legal challenge route); whilst ensuring that this will be [a] properly controlled and managed operation….

I am sure that there will be more twists and turns here and Tlais may well conclude that he can’t make it work, but in the meantime, we are buying time and building a fact trail that helps us. In the meantime, despite several requests to improve our offer, we have held the line – as you say, his banking problems (if genuine) are his concern”

TEL submits that the reference to “buying time and building a fact trail that helps us” shows that Gallaher hoped that, if it strung things along for long enough, Mr Tlais would slide into insolvency, and was putting together a sequence of correspondence which would give the appearance of trying to support TEL, when Gallaher had no such intention. I take a less cynical view. Mr Rolfe no doubt thought that it would stand Gallaher in good stead, in the event of any legal dispute, to show that it had tried to make things work. He also realised that any arrangements that were made would come under intense scrutiny by the Board, particularly if Gallaher was to give an income guarantee; and time was needed to work out a properly constructed plan with numbers in which he and a sceptical Mr Hainsworth could have some confidence when making any recommendation. He also did not want to improve Gallaher’s offer. He did not regard Mr Tlais as verging on insolvency. Indeed he and Mr Hainsworth had doubts as to the extent of Mr Tlais’ problems with the banks.

Mr Hainsworth’s reply was as follows:

“He is going to dance around all he can but the fact remains those markets cannot absorb this level of new product overnight.

Our competitors have been there for some time with recognised brands.

We have all made the best efforts to move it forward but reality is that in emerging markets margins are low and to build volume takes time.

His profit expectations are optimistic to say the least, Norman seems convinced that Dorchester will sell very well, I really think he has lost touch of reality.”

“Neutralising the business”

On 2^nd August 2004 in an e-mail to Mr Perks, Mr Hainsworth said:

“I hoped that by insisting on Gallaher having $ 3m of marketing p.a. before any profit split we would effectively neutralise the business if shipments are to Duty Paid Market because the volumes become very unlikely i.e. 3 BN p.a. just to cover marketing on $ 10 margins”

Mr Hainsworth had some difficulty in explaining the meaning of the words “we would effectively neutralise the business” when he was first asked about it at the end of his evidence on Tuesday 10^th June 2007. He appeared to be saying that he was concerned to neutralise the risk to the business; but, if so, his answers did not make much sense. TEL submits that this was because what he revealingly meant was that his hope was to kill off the business. On Wednesday 11^th June 2007 he told me that what he meant was that the result of that level of marketing expenditure (covering both advertising and selling) would be that the business would be profit neutral.

In my judgment Mr Hainsworth was genuinely perplexed on the Tuesday as to what he had meant. He had used a form of management-speak, which (as often) obscures meaning, that was intended to indicate that at a mooted $ 10 margin the volume of duty paid sales would not support the level of marketing expenditure budgeted for and would thus show the impracticability of the proposal. It was not suggested that this level of marketing expenditure was unreasonable or artificial. I accept his evidence that he took a figure of $ 2.6 million for advertising from an earlier Jack plan and added some more to cover the cost of Gallaher having people on the ground to control the business. This was not unreasonable. The $ 3 million figure was specifically referred to in the Heads of Agreement.

Nor do I regard Mr Hainsworth’s e-mail as indicating that he had given up on negotiations. After this exchange the parties continued to negotiate and Gallaher made further concessions e.g. by the addition of territories to those specified in the original Heads of Agreement.

Mr Paul Murden, who in April 2004 became Gallaher’s Vice President, Developing Markets, considered how the new business structure could operate. In late August (by which time Gallaher had added Afghanistan, Pakistan, and Egypt to the list of proposed territories) he went to TEL’s head office in Cyprus (which he found surprisingly lacking in facilities and employees for a business of the size that Mr Tlais claimed to have built). He arranged to meet with TEL’s distributors – see paragraph 469 below. He became concerned that TEL was seeking to engage in transit business, having regard to Mr Tlais’ expressed desire to include markets such as Sudan, Mozambique, Chile, Paraguay, and Libya via Benin, rather than focusing on a few key markets.

On 9^th September 2004 a meeting took place in Lausanne attended by Messrs Hainsworth, Murden, Jack and Whale for Gallaher and Mr Tlais and Clarke for TEL. When Mr Tlais talked about a guarantee of income, Mr Hainsworth told him that, if he expected Mr Northridge to write him a cheque he could go to Court now. During the course of this meeting Mr Northridge repeated his instruction to Mr Hainsworth to try to make the best deal and to make it work. The meeting ended constructively. In his letter to Mr Tlais of 10^th September confirming the upshot of the meeting Mr Hainsworth described it as “most productive”.

Agreement was reached on a number of matters including the following: (i) that a number of territories (Yemen, Sudan and the Gulf States) should be added to those previously decided on; (ii) Gallaher agreed to consider whether an agency structure could be introduced in respect of the Cyprus domestic market (which would be of benefit to Mr Tlais in relation to his refinancing operations); or, if it could not (the decision not being for Mr Hainsworth) Gallaher would introduce Mr Tlais to its bankers with a view to helping him to refinance his borrowings; (iii) the brand range would be extended to include a number of Sobranie variants (in addition to LD, Gold Bond, Dorchester, and Robson), subject to trademark restrictions for particular territories and subject to Gallaher having a right of veto over the precise brand mix for each market; (iv) all products would be subject to double wrapping which would limit the risk of spotting.

Later in September Mr Murden and Mr Richard Johnson (“Mr Johnson”), who had recently taken over responsibility for the Middle East, met representatives of TEL’s distributors at Adam Trading’s offices in Dubai. These were (i) Dr Al-Mahamid; (ii) Hafeezulah and an associate (in respect of Afghanistan and Pakistan); (iii) Wahib Tabra of Jode and Sara General Trading (in respect of Iraq); (iv) Mobbaraki and Hazem of Parsian Fougan (in respect of Iran); and also (v) Jamal Mahmoud of Saman General Trading (in respect of Iraq). Mr Tlais had written to the first four in advance asking them to provide in writing a wide range of detailed information in English covering matters relating to their areas. As he put it:

“As we are dealing with a British Company with a limited mentality it is important that you prepare the … information in a manner that caters for this type of individual. A good professional western presentation is essential....”

In the event Mr Murden was not impressed. He did not regard the distributors as having prepared a proper professional presentation with information about their operations, the tobacco market in their proposed regions and their proposals for developing a market share. At best he thought they were amateurish. He could not see, in the light of the meeting, what value TEL could add to Gallaher’s distribution in the Middle East.

On 20^th September Mr Jack wrote to Mr Tlais a letter saying that he knew that overall Mr Murden and Mr Johnson were, after a modicum of “culture shock”, impressed with the meetings and the quality of the distributors in the context of the markets. It was suggested to Mr Murden, whose evidence was that he did not see that letter at the time, that his supposedly poor impression was something recently thought up by him or put into his head by another. I accept his evidence that it was not.

On 13^th October 2004 a meeting took place between TEL and Gallaher at Weybridge for the purpose of dealing with the issues arising from the Old Stocks and the destruction of the damaged Dorchester. The matters agreed subject to contract were set out in a letter from Mr Rolfe of 15^th October 2004. Mr Rolfe expressly reserved Gallaher’s position in relation to all of the points in the letter pending resolution of all outstanding issues. It was clear at the meeting that Gallaher would make no cash settlement in relation to the damaged Dorchester until the proposed new agreements had been signed. But Gallaher offered to provide a letter to the bank explaining the position negotiations had reached and that, when the new agreements were entered into, a sum of $ 3,218,501 would be released to TEL.

Mr Tlais responded by writing to Mr Northridge on 26^th October claiming that the letter of 15^th October did not accurately reflect the details of the meeting on 13^th, making a number of unflattering remarks about Mr Rolfe, and also reserving his position on all the points mentioned in the letter pending resolution of all outstanding points.

On 4^th and 5^th November 2004 Messrs Keevil, Moxon and Jack met Mr Tlais in Cyprus and reached a subject to contract agreement of principal terms in relation to past dealings with TEL. That they had done so was recorded in a document of 6th November.

In November 2004 negotiations between the parties in relation to the new agreement reached an impasse. On 10^th November 2004 TEL produced comments on a draft Term Sheet that had been produced by Gallaher and sent to Herbert Smith, who were then acting for TEL. Some of these appeared to Mr Hainsworth to be going back on points that Gallaher thought had been agreed. The sticking points were these:

TEL claims that the negotiations, which (because of a family illness) Mr Hainsworth had now left largely to Jonathan Wale and Suzanne Wise, broke down predominantly as a result of Gallaher’s insistence on having the right to remove territories or terminate the joint venture without compensation on account of underperformance by distributors whilst retaining the right to have the final say in respect of the appointment of such distributors. It wanted such a right, TEL submits, because it would afford an easy way for Gallaher to extract itself from the new arrangements in the future. Mr Hainsworth regarded such a provision as standard commercial term in a manufacturer’s contract for the distribution of its own products; and thought that no agreement was reached was because there was an issue as to who should be in control of the business.

Disputed term (iii) (see paragraph 475 (iii) above) was very much in Gallaher’s favour. I do not regard it as unreasonable, from Gallaher’s point of view, to have required it, particularly because the issue of control (and the financial consequences thereof) was not at this stage fully resolved as appears from paragraph 6 of TEL’s comments on the term sheet which records that “further discussion will be required to agree the level of responsibility that the Gallaher entity wishes to take, including the financial impact of all decisions taken while in a controlling position”. Mr Hainsworth’s recollection was that in the latter part of the year there were disputes over who would have control of the brands, what brands would be sold and in the event of a brand getting into trouble what mechanism would deal with that.

In mid November Gallaher receive a letter from a Jordanian lawyer on behalf of Mr Nabil Karam seeking to arrange a meeting “to discuss the legal aspect arisen [sic] as a result of the supplies of your brands made to my client through your distributor, Tlais Trading Ltd, for importation into the territory of Iraq during the period of 2000 -2001”. Mr Karam had been placed on a blacklist by the US Treasury as someone playing a key role in Uday Hussein’s cigarettes smuggling and racketeering activities (Footnote: ⁵⁷). Mr Tlais was aware (because Fadi Nammour told him) that a proposal for doing business in Iraq whilst sanctions were in force – see paragraph 547 below – was to be sent by Namelex to Mr Karam; and he had himself met with a representative of Trading and Transport Service Co, Mr Karam’s company, to discuss business for Jordan duty free shops. Gallaher suspected, probably rightly, that this was a tactic employed by Mr Tlais to indicate that he could embarrass Gallaher if Gallaher did not sign up to a commercial deal.

Gallaher had hoped that, with Sovereign deleted from the brand mix, the quantity of goods supplied to TEL that were seized would reduce. What happened was that seizures of Dorchester began significantly to rise.

On 2^nd September 2004 Mr Jeffery wrote to Mr Tlais reminding him that until such time as new arrangements were entered into the TEL Agreement remained binding on TEL and Gallaher. He reminded him that:

“Under that agreement, in respect of all sales made by Tlais Enterprises Limited you have various obligations, including:

a.

To comply with our Policy on International Trade;

b.

To ensure that sales are intended for final sale to consumers within your territories;

c.

To supply us within 7 weeks of any shipments with evidence of the shipment of the order to the appropriate territory;

d.

To keep paper records showing clearly all sales made by you; and

e.

To ensure that anybody to whom you sell goods complies with our Policy on International Trade”

Mr Jeffery told Mr Tlais that it was critical that he was able to explain to HMCE why there had been seizures of Dorchester. He referred to (a) a seizure in Poland involving 2 million Dorchester and 6 million Sovereign destined for Iran and Sudan and another seizure of an unspecified quantity of Dorchester and Sovereign; and (b) two recent seizures in Spain consisting of 3 containers (30 million) of Dorchester supplied to Namelex/Highstreet and 1 container of 9 million Dorchester supplied to TEL. In addition HMCE had so far notified Gallaher of UK seizures of some 56 million Dorchester supplied to TEL. He recalled that, when Mr Tlais had met HMCE in Cyprus in 2002, he had made clear that he believed there was no issue with Dorchester supplied to Highstreet as Highstreet was fully under his control.

He added:

“I am very concerned at their potential reaction if I simply supply them with your current explanation (Footnote: ⁵⁸). In the circumstances, I must ask you to provide me with details of:

i.

The parties to whom you have supplied Iranian and other Dorchester product in Libya, Afghanistan, Iraq and elsewhere;

ii.

The countries within Latin America and parties to whom you have supplied Dorchester;

iii.

The volumes of Dorchester that were mixed with Sovereign and the parties to whom you supplied these goods;

iv.

Given your obligations to ensure that sub-distributors to whom you sell product comply with our Policy on International Trade, the steps that you took to ensure that your customers exercised proper control and management over goods that you supplied.”

On Friday 15^th September Mr Jeffery met Mr Byrne. Mr Byrne told him that Sovereign remained the most seized non counterfeit brand. On 24^th September Mr Jeffery, having had no response to his letter of 2^nd September 2004, wrote to Mr Tlais again saying that it was absolutely essential for Gallaher to demonstrate that TEL was adhering to its responsibilities under the TEL Agreement. He expressed the view that there was a real risk of HMCE “extending the red card”; and asked for a full response to his questions by Friday 1^st October prior to the meeting with HMCE in 4^th October.

Mr Tlais’ response came on 1^st October 2004. He complained that the bulk of information that had been passed to him about seizures was of little or no use as it only dealt with quantities of goods forming part of a larger production batch In reply to the letter of 2^nd September 2004 he said that it was in fact agreed that:

“I would TRY and control up to 80% of the business during the one and a half years initial period. I also requested a replacement for Sovereign that had previously been in the hands of smugglers”

He said that he had relied on Gallaher to present HMCE with an accurate and detailed narrative of the problems he had encountered and the level of cooperation that had been extended from his side to support the business. He referred to the verbal information covering a wide range of issues to prevent smuggling that he had provided to Mr Jack at each meeting with him. He acknowledged that “until such time as the new arrangements are agreed the existing agreement is binding on both parties”, that he was fully aware of his obligations under (a) – (e) and had complied with them. As to Dorchester he referred to the spotting problem, the fact that he had halted sales at the beginning of 2003; that he had been told to sell the damaged Dorchester for “best value” and had proceeded to ship them primarily to Iraq, but that most customers would not pay.

In essence his response to the questions posed of him was:

Attached to the letter were a number of bills of lading and other shipping documents, some of which contained no reference to TEL or Adam Trading, and which for the most part referred only to volumes of cigarettes and not the brands. A number of Dubai customs bills were unstamped. The bills of lading for Latin America added up to only 4,870 cases (not 6,000 as had been referred to by Mr Tlais in a letter of 29^th January 2004 (Footnote: ⁵⁹)). None of them related to Libya. Mr Clarke said that Mr Jack had seen documents relating to Libya of which Gallaher did not keep copies, but there is no means of knowing whether that is so. These documents did not meet the standards expressed in Mr Jack’s letter of 21^st July 2003 (in particular items (a) (b) and (d)): see paragraph 381. Mr Clarke’s view was that, given the problems with the product, Gallaher was lucky to get anything at all.

On the same day Mr Tlais faxed to HMCE a letter, wrongly dated 1^st September, which he attached to his letter to Gallaher, saying that TEL had sent Gallaher all the documents requested by Gallaher and reiterating TEL’s strong commitment to combating smuggling. The letter expressed TEL’s happiness to supply any further documentation required and encouraged a dialogue between the parties “to ensure that as clear a picture as possible is gained with respect to the situation with the Dorchester brand”.

On 4^th October 2004 Mr Jeffery met Mr McCallum and updated him on negotiations with TEL. He told him what brands and territories the new arrangements would cover. He also discussed Mr Tlais’ offer to meet with HMCE which Mr McCallum said he would consider once the new agreement had been signed. On 24^th November 2004 Mr Jeffery, who now regarded a red card as highly likely, met him again. He explained that outline terms had been agreed regarding the old stock (about the disposal of which in an uncontrolled manner HMCE was concerned) and that everyone at Gallaher was aware of the importance of seeking to ensure that such cigarettes did not form part of an illicit trade. Mr McCallum expressed serious concern at the level of seizures of Sovereign and Dorchester cigarettes supplied to TEL. He expressed a personal view that the level of seizures of Sovereign and Dorchester warranted a red card but said that he intended to discuss the matter further within HMCE.

On 30^th November 2004 Mr Jeffery telephoned Mr McCallum. His note to himself, from which he spoke, included the following:

“As you know we have been trying over the last six months to find a way to reengineer the business model with TEL to make the controls and management as watertight as possible. We are not there yet and we have increasing concerns that we will ever achieve this with TEL. The commercial discussions are ongoing and could well break down – we will know in the next few weeks …If they do break down then we would understand why you want to issue a red card given that between us we have done everything possible to make things watertight. As you mentioned, we agreed protocols with TEL in 2003 and despite the assurances given about Dorchester there have been ongoing seizures.

If you do issue a red card, then under the contract we would have to formalise the suspension of our distribution agreement which would ensure no further sales.”

Mr McCallum said that HMCE had to date recorded for 2004 seizures of 126 million Sovereign and 62 million Dorchester cigarettes, which on the assumption that about 10% of smuggled goods were seized, suggested that over 1 billion Sovereign, and over 500 million Dorchester had been smuggled.

On 2^nd December 2004 HMCE published its paper “Measuring and Tackling Indirect Tax Losses – 2004”: see paragraph 12 above. The paper estimated losses to the Treasury from smuggling in 2003 - 4 at £ 1.9 billion. It showed that, in respect of seizures of over 500,000 sticks, genuine UK brands accounted for 28% of seizures by HMCE. Of that 28%, 58% were Sovereign and 16% Dorchester. In other words 74% of all genuine UK brand seizures of over 500,000 sticks were of Gallaher products. The proportion of all genuine brands seized was about 45%.

On Tuesday 7^th December 2004 Mr Jeffery and Mr Keevil met Mr Wells and Richard Las of HMCE. Mr Jeffrey had prepared a note to himself, which he must have started as a note for a telephone conversation ahead of the meeting (Footnote: ⁶⁰), which included the following:

“Ahead of the meeting [i.e. the Treasury Select Committee Meeting on 12^th January 2005] you may want to issue a red card and … given the level of seizures of both Dorch + Sov, we would understand

TK [Mr Keevil] would be happy to join the discussion if you have not decided

Our perception under the MOU that it is both Gall + Customs interest for you to issue Red Card before + not after Select Committee. TK has briefed our Chairman who supports this viewpoint

If no red card we cannot under distribution contract fail to supply + we now know that we will be unable to have control + management that we both require.

There is now pressure to supply TEL with stock. As we have not supplied whilst negotiating new agreement we are now being threatened with legal action for not trading.

If there are others in C & E who do not want to progress this, then we would be happy to meet whoever.”

At the meeting Mr Wells produced some slightly different figures for seizures of genuine cigarettes so far recorded: 115 million Sovereign and 71 million Dorchester. (Namelex had been red carded after seizures of about 100 million cigarettes). Mr Wells noted that, while some smuggled brands came from a variety of distributors and locations, Gallaher brands seemed confined to a particular distributor (Namelex then TEL) and limited locations. Dorchester seizures had now increased to 60% of the level of Sovereign seizures.

Mr Wells told Gallaher that HMCE found it difficult to square the level of seizures with the MOU and that it believed that, given the high level of seizures, TEL should be treated as a red card customer. He said he would write to Gallaher.

Gallaher’s brief note of the meeting does not indicate the extent to which Mr Jeffery used the phraseology of his note. But four features of the meeting seem to me clear. Firstly, HMCE was very close to issuing a red card. Secondly, Gallaher, as HMCE knew, appreciated that that was so. (Mr Jeffery and Mr Keevil thought a red card was extremely likely). Thirdly, Gallaher indicated (i) that, if a red card was to be issued, it would be better if it was done before rather than after the Treasury Select Committee (to avoid the suggestion that nothing had been done by HMCE or Gallaher until the Committee acted) (Footnote: ⁶¹) and (ii) that that was in the interests both of Gallaher and HMCE (the Gallaher note records: “Achieve we both want”).

Gallaher’s purpose by now was to push HMCE towards issuing the likely red card before rather than after the meeting. Mr Keevil told Mr Wells at the meeting that Gallaher had worries about the contractual position with Tlais, and he gained the impression, probably correctly, that Gallaher felt that the further HMCE went in terms of pushing Gallaher, the more that would help. As will be seen (see paragraph 510 below), when what looked to be a red card was shown, Mr Jeffery asked for clarification that that was indeed what he had received.

The Board of Gallaher Group Plc met on Thursday 9th December 2004 and discussed the state of the negotiations with TEL. Mr Hainsworth, who was now a main board director, said, as the minutes record, that:

“Most importantly, [he] was not satisfied that what was currently proposed by Mr Tlais would ensure that we could exercise satisfactory control and management over the Gallaher brands which were proposed to be supplied to the new business if the arrangements were finalised”

Mr Hill suggested to Mr Hainsworth that, in saying this, he was now toeing a Gallaher party line. Mr Hainsworth told me that he did not toe party lines. Having heard him I am sure that that is so. Mr Tlais accurately described him to Mr Northridge (in an e-mail of 27^th December 2004) as a “straight and clever businessman”. Mr Clarke regarded him as a bright guy for whom he had a lot of time.

Mr Keevil pointed out that the recent HMCE Report - “Measuring and Tackling Indirect Tax Losses – 2004” – showed that 74% of the HMCE seizures of legitimately produced but illegally imported product was Sovereign and Dorchester. This was a misreading of the HMCE paper (see paragraph 491 above). The 74% figure related to all genuine UK brand seizures over 500,000 sticks.

The Board regarded it as critical, if the proposed arrangement was to go ahead, that Gallaher could effectively control and manage products supplied to the joint venture. It agreed to form a committee to review any proposed new arrangements before they were executed. In the event the members of the committee were Mr John Gildersleeve, Gallaher’s non-executive Chairman, Mr Northridge, Mr Rolfe and Mr Keevil.

On 15^th December 2004 Mr Hainsworth wrote to TEL setting out the three fundamental issues that remained unresolved namely:

On 24^th December 2004 Mr Tlais responded by e-mailing Mr Northridge to the effect that negotiations had reached an impasse; that it was unacceptable for TEL to be subject to sanction for failures which were the responsibility of the distributors of the joint venture, and inconsistent with the agreeement made in July which stated that neither party should seek to impose unreasonable conditions on the other. Unless an amicable settlement could be reached it would be necessary to consider how to bring the relationship to a close.

The requirement under (i) was certainly very tough. Whether or not it should be characterized as unreasonable is not an issue that I need decide. The provision in the subject to contract Heads of Agreement that neither party should seek to impose unreasonable terms gave rise to no legally enforceable obligation.

TEL contends that HMCE was not given the full picture. Firstly they were not fully informed, as they should have been, of the problems that that had arisen in respect of Iranian Dorchester, which TEL had been instructed to dispose of in non-core markets (as to which see paragraphs 1063ff below), no doubt, TEL submits, because that would cast Gallaher in an unflattering light. Secondly, they were given to understand that Gallaher had ongoing concerns about the control of brands under the proposed new agreement, when Gallaher’s real concern was about being able to terminate the distribution of brands which were under its control.

At the end of the meeting in July 2003 it was Mr Tlais himself who explained the problems with the damaged Dorchester: see paragraph 395. HMCE does not, however, appear to have been told about the full scale of the damaged Dorchester or that seizures of that product might be attributable to its sale in non core areas, much less that Gallaher did not consider TEL at fault. If HMCE had been told that Gallaher did not consider that TEL was at fault, it might have altered its view as to fault, but it was unlikely to have altered its approach. HMCE’s procedure is to deal with the manufacturer in the light of the quantity of seizures over time. By now the quantity of seizures was simply unacceptable (whatever the reason or excuse). HMCE regarded TEL as the link between Gallaher’s Sovereign and Dorchester and the smuggling of both that had taken place over an extended period. HMCE looks to the manufacturer to take the steps it thinks necessary to sort out the problem.

I do not regard Gallaher’s failure to exonerate TEL in respect of Dorchester before HMCE in those terms as culpable, not least because legal responsibility for the damaged Dorchester and the causal effect of its sale, so far as smuggling was concerned, was highly debatable.

On 30th November HMCE was told that Gallaher had been:

“… trying over the last six months to find a way to reengineer the business model with TEL to make the controls and management as watertight as possible. We are not there yet and we have increasing concerns that we will ever achieve this with TEL ….

On 7^th December 2004 Mr Wells of HMCE was told by Mr Jeffery and Mr Keevil that they could not be sure that future supplies of product from Gallaher to Tlais would remain in their intended market. That was their opinion. Mr Wells regarded that remark as very important. He thought that, if he had been told that Gallaher did not have doubts about future supplies remaining in their intended market, things might have turned out differently in terms of what HMCE expected to be done.

HMCE was not told that the principal reason for the impasse was Gallaher’s wish to be able to remove Territories and or terminate in the event of underperformance, in circumstances where Gallaher was intended to control the joint venture company and shipment was to be made direct to the in-market distributor. If it had been told something like that, it is likely that it would have regarded that as a matter for commercial negotiation, and not as altering the approach that it needed to take.

Meanwhile on 23^rd December 2004 Mr Wells had written to Mr Jeffrey giving updated figures: 2003-4 - Sovereign seizures were 58%, Dorchester seizures were 19% of all seizures of genuine cigarettes; 2004-5 to date - Sovereign seizures were 55%, Dorchester 14%, with approximately 90 million cigarettes awaiting the results of tracking and tracing. He summarised the relevant provisions of the MOU and said:

“In view of Gallaher’s concerns about whether future supplies of cigarette would remain in their intended destination and the level of seizures already established, and in keeping with the terms of our MOU, Customs request that Gallaher take action in respect of the risks of further product supplied to TEL contributing to the tobacco smuggling problem in the UK. We will want to review this action with you at our next meeting in the New Year.”

On 6^th January 2005 Mr Jeffery wrote to Mr Willis saying:

“I understand that the “red card procedure” … is now encapsulated within the [MOU].. Nevertheless, so that Gallaher and TEL are absolutely clear as (sic) the position, I need your confirmation as a matter of urgency that TEL should now be treated as being subject to the “red card procedure, I should stress that in seeking this clarification, I also understand that the action that needs to be taken is solely our responsibility”

On 7^th January Mr Wells replied:

“I can confirm that Customs feels that the concerns arising with Tlais Enterprises are sufficiently serious to require action under the terms of our MoU as set out in my letter of 23^rd December and commensurate to the red card procedure subsumed within that process and accordingly we invite Gallaher to consider the position”.

The somewhat stilted language of this letter is probably attributable to the fact that HMCE, at least in the upper echelons, regarded the “red card” metaphor as inapposite (since HMCE had no powers of coercion and it was for the manufacturer to decide what to do) and in part a result of the fact that the MOU could be said to have overtaken the red car procedure anyway.

Mr Wells' concern, as an officer of HMCE, was to reduce the amount of brands smuggled into the U.K. It was the renewed presence of a different Gallaher brand in the illicit market, notwithstanding that there had been a period of time to deal with the problems of the Namelex period, that most exercised his mind. His approach would probably not have been any different if Gallaher had impressed on HMCE that they did not consider that TEL was to blame for the level of Sovereign seizures and said that they had given instructions for large quantities of damaged Dorchester to be sold into non core markets. By now he would probably have regarded that as an explanation or excuse which could not hide the fact that whatever steps were being taken to prevent illicit trade, they were inadequate. The position might have been different if he had grounds which satisfied him that there were unlikely to be significant seizures of goods the subject of future shipments. But it seems unlikely that he would have reached that view before seeing a concluded new arrangement with TEL which so satisfied him.

On 10^th January 2005 the Gallaher Group Board committee met from 10.15 to 10.30. The minutes record that:

“In the light of the letter from [HMCE] requiring us to take action, having regard to the steps that we had already taken to date, Mr Keevil advised the Committee that under the terms of our [MOU] and our [ITP] the Company had no alternative but to suspend supplies.

After due and careful consideration it was agreed that it was in the best interests of the Company to suspend supplies to TEL and given Mr Tlais’ proposal that we should seek to bring the business relationship to an end Mr Keevil should write to him, notifying TEL of the decision to suspend supplies and inviting Mr Tlais to set out his thoughts on discontinuance of the current business relationship”.

On 11^th January 2005 Mr Keevil wrote to Mr Tlais to inform him that “we have now received a letter from HM Customs requiring us to take action in respect of our business relationship with TEL”, and that Gallaher’s committee overseeing the relationship with TEL “met yesterday and concluded that, in light of the requirement from HM Customs to take action in respect of TEL, we obviously cannot, as you will appreciate, make any further supplies at this time”. This constituted a formal suspension of all supplies to TEL. The letter invited Mr Tlais’ thoughts on bringing a formal end to the business relationship.

In January 2005 Mr Espin made a trip to Dubai. On what was probably 12^th January 2005 he was told by Mr Jack in the evening, before he and Mr Jack went to dinner with Dr Al-Mahamid, that the latter had, until 18 months previously, been a smuggler but that he had had to stop because he had established a business developing a product called Mecca Cola and was now a respected businessman. Mr Jack said that Mr Tlais was not a smuggler.

On 13^th January 2005, prior to a relatively informal meeting with Dr Al-Mahamid, Mr Espin and Mr Jack were shown some schedules on a laptop computer which had been obtained by private investigators called Ask International while investigating a separate matter. The information contained in them, which Mr Espin and Mr Jack did not examine in detail, suggested that there had been widespread and serious breaches of the TEL Agreement throughout the period of its operation in that goods had been sent all over the world without going to their intended markets. Dr Al-Mahamid was not then asked about the Schedules or whether he had been diverting goods. He was asked about two containers of Dorchester Menthol which had ended up in Lomé. Dr Al-Mahamid acknowledged that he had sent the containers there and said that they were on the way back. He did not say, nor was he asked, why he had sent them there (Footnote: ⁶²). The meeting was affable.

On their return to England Mr Jack, who also saw the Schedules, expressed the view that Dr Al-Mahamid might become Gallaher’s main distributor if the planned agency relationship with Gallaher went ahead because he was no longer a smuggler and had only smuggled for Imperial Tobacco. Mr Espin did not discuss the Schedules with Mr Jack any further. Having discussed the matter with Mr Keevil he asked Ask to send over the schedules. The documents appear to have arrived in e–form and hard copy on 4^th and 22^nd February but their order appears to be misplaced in the trial bundles.

According to an initial summary of the Schedules made by Gallaher in February goods had gone in 2004 to ports of discharge in Holland, Romania, Ukraine, Pakistan, Slovenia, Montenegro, USA, Malaysia, Togo and Singapore. The totals of such goods in respect of 2004 were 115,400,000 Sovereign cigarettes and 253,430,000 Dorchester out of total supplies of 412,580,000 and 454,240,000. The Schedules also indicated destinations such as Riga (Latvia), Varna (Bulgaria), Cotonou (Benin), Iraq (during sanctions), Thessaloniki, and Tenerife.

In view of the quantity of goods concerned and the close relationship between TEL and Adam Trading Gallaher regarded this information as evidence of, at best, a reckless failure to take proper steps to control the goods. On 14^th February 2005 Mr Clarke told Mr Jack that Mr Tlais accepted that there was “a serious case to answer” but said that the issue was with his partner and should be dealt with under the normal agreed procedure by the provision to Mr Tlais of evidence, followed by an investigation, which, if the matter was proven, would lead to a red card being issued.

On 16^th February Mr Tlais told Dr Al-Mahamid that he was ceasing supplies of Gallaher products to him or any of his companies. He invited any explanation of the summary referred to in paragraph 519 above, which he attached. Adam Trading’s letter of 24^th February to Mr Tlais expressed Dr Al-Mahamid’s shock at the allegations; informed Mr Tlais that he was making a chart for Gallaher to show clearly how and where Gallaher smuggled and who was involved (he said it included Mr Fawaz); but did not condescend to any details about the contents of the Schedules. So far as the evidence shows, no further attempt was made by TEL to investigate the shipments the subject of those schedules. Dr Al-Mahamid also wrote to Gallaher on the same day denying the charge of smuggling and claiming that Mr Fawaz had supplied cigarettes for a smuggling operation in Egypt and that Austria Tabak had run a large scale smuggling operation in Romania through duty free shops. He complained that his actions against counterfeiters had not been adequately supported and that he had been damaged by having to dispose of the damaged Dorchester. He did not, however, provide a response to the Schedules

The Board Committee met on 4^th March 2005. Mr Keevil outlined the investigation carried out by Mr Espin and himself, including the Adam Trading Schedules, and the serious concerns that arose from it. The Committee resolved to terminate the TEL Agreement and to commence proceedings.

On the same day Slaughter & May on behalf of Gallaher :

On 5^th January 2005, following a request from Mr McCallum of HMCE, Mr Jeffery asked Mr Jack for information on TEL’s stock levels. On the same day Mr Jack provided his understanding of the position as at September, with the caveat that he had not dealt with TEL for some time.

On 19^th January 2005, Mr Wells of HMCE wrote to Mr Jeffery seeking further information. He asked for the results of the stock reconciliation that he understood Gallaher was about to carry out and asked about “Gallaher’s plans to safeguard this stock and prevent its entry into the illicit market, and if appropriate to invoke the ‘buy-back’ clause in your contract with TEL”.

On 26^th January 2005, Mr Jeffery wrote to Mr Tlais asking for a summary report of TEL’s stock holding, setting out “a) Stocks by brand and location at the time of last reconciliation; b) Sales by brand since the reconciliation identifying your customer and market destination; c) Current stocks by brand and location; d) Status of the stock i.e. whether or not they have been pledged to BLOM bank”.

On 3^rd February 2005 Mr Tlais responded, stating that the stock details provided by Mr Clarke of TEL in a letter of 8^th October 2004 were still correct save that 5000 cases of Sovereign had been released as had 1000 fresh Dorchester and the full balance of Businessman. The letter of 8^th October 2004 had referred to a number of storage places but had not allocated specific quantities to specific locations, although manuscript notations on the letter suggest that Mr Jack was told those details. Mr Jack turned this into a report which allocated the different brands/flavours to different locations. It did not provide the level of detail requested by Mr Jeffery in his letter of 26^th January 2005.

On 14^th March 2005, Slaughter and May wrote to TEL seeking an inventory of TEL’s stocks so as to enable Gallaher to decide whether or not to invoke clause 10(vi) of the TEL Agreement. This clause provides:

“If on termination of the Agreement the Distributor has on hand any stocks of the Brands… GI shall be entitled (but not bound) to purchase all or part of such stocks from the Distributor or require the Distributor to sell all or part of such stocks to a third party nominated by GI at (in respect of stocks of the Brands) their ‘in warehouse cost price’ to the Distributor (unless such stocks shall not be in a sound and saleable condition in which case at their lesser value)…. The price payable by GI to the Distributor on any such purchase as aforesaid may be set-off by GI against the amount of any monies then owing to GI by the Distributor but without affecting the right of GI to recover any balance of such monies owing to it.”

Slaughter and May’s letter asked for the location of all stock, whether title in such stock had passed to a distributor, and if so which, and to know “what your intentions in relation to the stock are”. They also sought clarification whether goods were pledged, and if so that “the documents which contain the terms upon which the stock had been pledged” be provided.

On 31^st March 2005, Rosenblatt (TEL’s then solicitors) responded to this request. They stated that all stocks were pledged to the bank, that “the ‘unsaleable’ stock has been inspected by GIL on a variety of occasions, thus this information is within your client’s possession”, and that “On 3 February 2005 you client was delivered an inventory” i.e. Mr Tlais’ letter of 3^rd February. On 6^th April 2005 Slaughter and May pointed out that this was inadequate.

On 27^th April 2005, Slaughter and May also wrote to BLOM informing it of Gallaher’s interest in the goods apparently pledged to it. On 26^th May 2005 Slaughter and May chased Rosenblatt for a response to the 6^th April letter.

On 27^th May 2005, Rosenblatt wrote purporting to accept an alleged repudiatory breach by Gallaher of the TEL Agreement. That letter claimed that, as a result of the alleged repudiation:

“So far as unsold Stocks are concerned, your clients are obliged and TEL hereby requires them to cancel [invoices outstanding] and collect the unsold lights on payment in full of the costs incurred in the storage of these goods and the settlement of the destruction account; TEL will look to GIL for (amongst other things) payment in full of the costs and demurrages surrounding the storage of these goods for the full period that they have been in the possession of TEL…”

The letter did not explain how the goods could be taken up despite the pledge to which they were supposedly subject or where exactly they were. By a letter of 7^th June 2005, Gallaher exercised its right to purchase, free from any encumbrances, all stocks of the brands of which Gallaher was the trademark owner which TEL was claiming were not in a sound and saleable condition. Gallaher agreed to bear the responsibility for the goods, relieving TEL of future liabilities for their storage and destruction. Slaughter and May asked for “TEL’s immediate proposals to enable the transfer of title in the relevant stocks and their delivery to our client free from any encumbrances and charges prior to the date of the passing of title”.

No response was received from Rosenblatt – whether as to the identity and location of stocks held by TEL, or as to the arrangements for the transfer of title and delivery: see the letter from Slaughter and May dated 22^nd June 2005. On 9^th August 2005, however, Rosenblatt wrote again proposing that TEL would seek to sell the stocks into the market and thereby establish which of them were unsaleable. It would then transfer the latter to Gallaher – but would sell off the remainder. Rosenblatt said that the sales would be in compliance with the Procedural Agreement. No record of these sales was provided to Gallaher, and none has been disclosed.

Slaughter and May wrote on 17^th August 2005 repeating Gallaher’s wish to purchase all unsaleable stock, bemoaning the absence of any accurate inventory, and disputing the need to seek to sell the goods in order to decide which were unsaleable. noting what it characterised as a change of tack by TEL, in claiming that some of the goods which it held were in fact saleable. Rosenblatt responded on 16^th September 2005, stating

“We have confirmed that our client is prepared to transfer to your client those stocks that are of no value in the market at all, in accordance with the election that your client has made. However, in order to establish which stocks fall into this category, our client will need to ascertain whether any value can be realised in respect of the stocks that it holds. To the extent that any value can be realised, your client has made no offer at all to purchase stocks from our clients, and selling the relevant goods into the market is the only course open to our client to mitigate its losses.”

Thus, even by September 2005, TEL did not apparently know, without a sale, which of the stocks that it held were saleable. Slaughter and May pointed this out in its letter of 20^th September 2005 – and noted the curiosity of the supposed pledge not inhibiting any sale.

On 10^th February 2006 Mr Tlais was convicted by the Thessaloniki Appeals Court (sitting as a Court of First Instance) for his part in a smuggling ring which had evaded Greek taxes payable on cigarettes valued at € 11 million. He was held to have provided material and moral assistance before and during the commission of acts of smuggling by his co-conspirators – Georgios and Heracles Anthemides and Christos Papkoulas. Mr Tlais was represented in the proceedings; but not physically present. He was sentenced to 4 years of imprisonment for the act of direct complicity in smuggling. He has exercised his automatic right of appeal.

After the Gulf war in 1991 shortfalls in Iraqi cigarette production were made up by illegal imports. In 2000 something like 10.9 billion sticks are reported to have been imported illegally. A considerable amount of evidence was adduced as to whether or not Gallaher or Mr Tlais supplied goods to Iraq for sale there whilst UN sanctions were in force. Each side has sought to criticise the other in this respect; but the issue seems to me to have limited relevance to the case.

Mr Tlais’ written evidence was that during the Namelex era Gallaher had been producing cigarettes for the Iraq market, which were identifiable as such because they bore a unique Iraqi health warning so that they could only legally be sold in Iraq. He said that Gallaher had supplied, firstly, a company called FREMA with Gold Bond. Mr Clarke’s evidence was that Mr Jack had told him on some later occasion that these goods were for the Iraqi market.

In a memorandum to Mr Keevil of 6^th June 2002 Mr Jack said that he had supplied Freddie John Paul of FREMA with goods for Libya, Jordan and the Balkans and refuted what he described as the “scurrilous and defamatory allegation” that he conspired in sanctions breaking in respect of the Iraqi market.

The Iraq regulations in force at the time required all packs to have in English and Arabic a Health Warning clause (“Smoking is a main cause of lung cancer, lung diseases and of heart and arteries diseases”) and the Tar and Nicotine contents of not more than 12 mg and 0.8 mg respectively.

In Jordan the health warning was required to be in Arabic and was slightly different (“Smoking is a major cause of cancer, diseases of the lung and diseases of the heart and arteries”). The pack had to have in English or Arabic the trade mark, name of the manufacturer, number of cigarettes in the pack and, country of origin and a batch or consignment number. The maximum tar and nicotine limits were in January 2001 12 mg and 1 mg and are unlikely to have been less in 2000. The maximum possible limit for carbon monoxide has been 15 mg since January 1998. The nicotine, tar and carbon monoxide content had to be displayed in Arabic on the pack.

A mock up of a Gold Bond pack that was supplied by Gallaher to Mr Nammour for approval in April 2000 (as to which see paragraph 552 below) contained the Iraqi health warning in Arabic and English together with the Iraqi tar and nicotine figures in both languages. It did not contain the carbon monoxide content or any of the other matters specified by the Jordanian regulations. The AMELA spreadsheet shows that 4,000 cases of Gold Bond “ME” with Arabic health warnings were supplied to “FREMA – Jordan” in May 2000. In July 2003 Gold Bond with the same bar code as on the mock up was reported to Gallaher by a distributor named Rahal Group as being in the market in Iraq.

Mr Tlais also claimed – in his written evidence - that Gallaher supplied Sovereign and Dorchester to Namelex and had delivered them to Dubai with instructions to him to release them in transit to Aqaba in Jordan, where they could be and were collected by a distributor named Trading and Transport Service Co. Much of the stock apparently turned green (it is impossible to tell whether that is so) and the balance of the goods - some 33,500 cases of Dorchester - remained in the warehouse in Dubai until it was destroyed in 2003 on Mr Northridge’s instructions.

In his oral evidence, however, Mr Tlais corrected this to say that he had been instructed by Charles Hadkinson, not Gallaher, to ship the goods to Aqaba and that Mr Hadkinson had told him that Gallaher knew about it and had put the Iraqi health warning on. He claimed that he had simply shipped to Jordan as instructed and had no further involvement.

Mr Tlais’ involvement in sales to Iraq goes further than that. On 13^th October 1999 Mr Nammour of Namelex wrote to Mr Tlais following an earlier meeting. In the course of the letter Mr Nammour pointed out that various Gallaher cigarettes had an English or a European health warning and that Sovereign Gold was currently sold in the CIS and in UAE, Iran and Iraq. As Mr Clarke accepted, the goods were thereby being offered to Mr Tlais with a selling point that they were suitable for smuggling into the UK or for sanctions busting in Iraq.

On 19^th June 2000 Mr Nammour wrote to Mr Tlais with a copy of a Namelex proposal for CT Tobacco. This referred to Gallaher brands having been launched in Iraq. On the same day he sent Mr Tlais a 5 page document outlining the Iraq/Gallaher business which Namelex intended to send to Transport and Trading Co, Mr Karam’s company: (see paragraphs 478 above). The attachment which was headed “Iraq Gallaher Business” began with the following words:

“After consultation with Abou Hameed, the only way for this business to be successful is for us to do it ourselves, with no intermediary assistance. This is too important a business to place in the hands of a trader who would not give it due care. Therefore, at the insistence of our Protector, we have decided to conduct the sale and distribution in Iraq ourselves”.

Mr Tlais accepted that he may have given some advice but did not explain what the reference to “our Protector” meant. From the rest of the document it appears to be Mr Karam who was to provide protection and security for all Namelex’s staff and operations. The document states that “our contribution” is to include securing the supply of Gallaher cigarettes and paying the costs of delivery to Aqaba.

On 31^st July 2000 Mr Nammour sent a letter to Mr Tlais headed “Re: Jordan Local Domestic Market” which enclosed a letter of credit for the purchase of 400 cases of Sovereign and Dorchester all sold at $ 99 per case, CIF Aqaba, “for sale and distribution in the local market in Jordan”. The letter recorded that Mr Tlais should open a letter of credit in favour of Gallaher at a price of $ 82.50 per case :

“which is a special price agreed by Gallaher for local domestic distribution in Jordan”

On 10^th November 2000 Mr Hadkinson wrote a letter to Mr Tlais headed “Re Iraq business” which began “As you know Andreas is already in Baghdad and has inspected the goods”. Andreas was a man who worked for Namelex. It also recorded that the goods were spotted; that Namelex had blamed Gallaher and that Mr Clarke was said to be leaving on Monday to discuss the matter with Gallaher

It is plain from this correspondence that Mr Tlais was well aware that cigarettes for which he had paid were to be shipped to Iraq for consumption there. That explains why in January 2003 Mr Tlais told Mr Keevil that he had “done bad things in the past”: see paragraph 367 above.

The letter of 31^st July appears to indicate that so far as Gallaher was concerned they were being told that the business was official business in Jordan.

On 29^th March 2000 Gallaher confirmed to Namelex (in an exchange of correspondence) that they agreed to put in hand an order for some Sovereign Gold with a Tar/Nicotine content of 12mg/0.8mg and an Arabic Global health clause. An initial order for 5 containers was to be produced “on receipt of materials 5 x containers”. On the same day Namelex confirmed that Gallaher had got the details correct but that the health clause should be in English and Arabic. They enclosed a specimen (which complied with Iraqi requirements). The Gold Blend mock up sent to Namelex in April 2000 had the same content.

On 2^nd August 2000 Mr Nammour wrote to Ms James (as Mrs Schiavetta then was) enclosing a letter of credit for $ 33,000 covering 1 container with 400 cases of Sovereign and Dorchester. These were the goods the subject of Mr Nammour’s letter of 31^st July. The letter said that all packs were to be printed with the English/Arabic Health Warning clause (“Smoking is a main cause of lung cancer, lung diseases and of heart and arteries diseases”) and that the Tar and Nicotine contents of Tar 12 mg and Nicotine 0.8 mg were “exactly as per the Iraqi specification” (Footnote: ⁶³). The letter of credit covered goods CIF Aqaba Port Jordan in transit.

The Sovereign and Dorchester the subject of the 2^nd August letter did not, therefore, comply with Jordanian, but did comply with Iraqi, requirements. The health warning on the pack, which was in English and Arabic and not just Arabic contained the slightly different Iraqi language, and there does not seem to have been a statement of the carbon monoxide content.

A separate letter, also of 2^nd August 2000, from Mr Nammour to Mr Jack headed “Re: Iraq” asked him to arrange a certificate attesting inter alia that Gallaher owned the trademarks in Dorchester and Dorchester International and that Dorchester International could be imported into the Iraq local domestic market. The letter included the sentence “It will be pertinent also to mention that we are your official distributors of this market”. Mr Jack wrote to Mr Nammour on the same day asking for information about an “alleged registration for Dorchester” including details of the name of the applicant. Someone must have been claiming the right to use the mark in Iraq and Mr Jack and Mr Nammour were considering how to defeat this.

Mr Clarke accepted that he had knowingly ordered goods for Iraq during the Namelex era which he said he thought were covered by a DTI licence. He thought that Mr Jack thought the same.

In September 2000 Mr Jack visited Iraq. During that trip he met Uday Hussein for about half an hour and discussed the possibility of post sanctions dealings. At this time there was a prospect that sanctions might lifted. There was nothing improper in this meeting. He also saw Gallaher product in the market and met someone who purported to be a Gallaher distributor. He challenged Namelex with this. It is not clear what this product was.

On 27^th September 2000 Mr Jack confirmed in his letter to Mr Clarke of that date that Mr Clarke had supplied him at a meeting shortly before then with a letter of comfort from the DTI and had “agreed to forward Fadi’s initial enquiry as well to complete the step”. The letter provided was a letter from the DTI of 10^th December 1999 to Mr Nammour, apparently responding to an enquiry of his of 29^th November 1999. It stated that it appeared to the DTI that cigarettes did not require an export licence unless the end-use of the intended export was as described in an attached supplementary notice.

Mr Clarke’s evidence was that it was Mr Nammour, and not he, who gave Mr Jack the letter, although he was present at the meeting when the letter was handed over. He only saw the letter at the meeting which he said took place in Weybridge in November 2001. I do not accept this for two reasons – firstly I do not accept that the November 2001 meeting took place; secondly I regard it as implausible that Mr Jack would have written to confirm receipt from Mr Clarke of a letter that Mr Clarke had not then seen, without any reply from Mr Clarke disputing that.

Thereafter Mr Jack was provided with a letter to the DTI on H & R Distribution Ltd notepaper dated 29^th November 1999 which stated that H & R had been approached by a trader for the supply of branded cigarettes to the Iraqi market. In fact, as it turned out, the request to which the DTI replied on 10^th December 1999 was a request in respect of Libya. Mr Jack then required Namelex to stop any supply to Iraq.

The AMELA spreadsheet shows that the Sovereign and Dorchester the subject of the letter of 2^nd August were supplied to “Namelex – Jordan” in October 2000.

An internal Gallaher document of 26^th April 2001 has under the heading “Current BD opportunities & Status” the cryptic sentence “Irak [sic]: confirm happy not to pursue outside of existing arrangement”. It is not clear to what that is a reference to. It may be to the discussions with Uday Hussein. The same document describes Iraq as “Believed to be ‘out of reach’ (sanctions)”.

It will be recalled that in his letter of 7^th February 2003, following his meeting with Mr Keevil (see paragraph 370 above), Mr Tlais had explained, in relation to the Arabic goods, that 33,000 cases of Dorchester had been purchased by him from Gallaher by letter of credit drawn on two banks at an invoice price of $ 90 a case and that after the beginning of the TEL era Mr Jack had asked him not to sell these goods.

The picture that emerges from this jigsaw is, so far as I can discern it, as follows:

Mr Jeffery looked into the question of whether Gallaher’s goods had got into Iraq in early 2001. Either as part of, or at the same time as, that process he discovered Mr Nammour’s first letter of 2^nd August. He did not believe that he saw the second. He also discovered the bill of lading that showed that the goods had gone to Aqaba in transit. He does not seem to have discovered that any of the goods went to Iraq.

If and insofar as Gallaher placed reliance on the DTI letter of 10^th December 1999 it was misplaced. The attached supplementary notice referred to UN sanctions on Iraq and directed the reader for information to the Sanctions Licensing Unit.

Looking at the matter in broad terms the issues for determination are as follows:

Before I turn to address those issues I must make some observations about some of the witnesses of fact. I was satisfied that Gallaher’s employees were endeavouring to give me their honest recollection of the facts, although that does not mean that I accept all their analysis without reservation. In particular there appeared to me to be some downplaying of the increased risk of smuggling of old or damaged product, and of the steer given to HMCE to wield a red card. Mr Byrne and Mr Wells of HMCE were plainly honest and independent witnesses.

Gallaher’s most significant absentee was Mr Jack, from whom a very long statement was taken. Gallaher made a final decision not to call him during the course of the trial. I have not read that statement nor seen its contents save to the extent that paragraphs were used in cross examination of Gallaher witnesses or referred to in opening. Gallaher regarded Mr Jack, who is no longer their employee, as having got far too close to Mr Tlais (Footnote: ⁶⁵) and as being a highly unreliable assessor of the strength of the markets in the territories (Footnote: ⁶⁶). It is noticeable that his reports were often markedly pro-Tlais and optimistic about prospects. He sent the letters of 13^th September and 21^st December 2001 which were designed to be misleading. I was not surprised that Gallaher decided not to call him. That lack of surprise does not cause me to forget (i) that he was the principal day to day contact between Gallaher and Namelex and Gallaher and TEL and could, ordinarily, be expected to be called, and (ii) that, the fact of his absence when coupled with the evidence adduced might justify drawing conclusions adverse to Gallaher. I do not, however, infer that he was not called because, had he been called, Gallaher’s case would have collapsed.

TEL could have called him. But they did not have access to him before the trial. Mr Jack left Gallaher’s employment in 2005. An undisclosed compromise agreement with him of 30^th May 2005 included a provision to the effect that “except as required by law, he must not divulge to any person any information concerning the business or affairs of the company or any associate company that came into his possession while he was an employee.” Slaughter and May asserted to TEL’s solicitors that approaching Mr Jack would be an attempted inducement of breach of contract, a breach of the Solicitors Conduct Rules and would infringe Gallaher’s rights in confidence. Gallaher failed to confirm to Mr Jack or his lawyers or to TEL that they consented to TEL contacting Mr Jack and his speaking with them. I draw no adverse inferences against TEL because it did not call him. I was told by TEL that much of his statement was helpful to its case but I do not propose to speculate on what he may have said.

The principal witnesses for TEL were Mr Clarke and Mr Tlais. Mr Clarke gave a very lengthy statement and was TEL’s principal witness, although he was neither a director nor a shareholder in TEL and had no authority to deal with customers. He described himself as “not a decision-maker in any way, shape or form”. His principal role was to communicate with Gallaher because of his command of English. It became apparent in the course of his evidence that there were a number of matters of which he gave evidence of which he did not have direct knowledge [e.g. Namelex’s and Mr Tlais’ intentions in the Namelex era).

His evidence indicated a preparedness to be part of a business without understanding important aspects of it and a willingness to accept something at face value even if told it by someone he distrusted.

As to the former, the Namelex business was, according to his evidence, run by Mr Nammour and himself. Mr Nammour dealt with the financial side, with which Mr Clarke was not involved, although it is apparent that he was involved trying to obtain finance to honour the $ 9 million credit extended to JL Spirits and Tobacco and he explained the delay in his failure to contact HMCE until February 2002, some 11 months after he was first asked to do so, as a period in which he was predominantly involved in financing. He was a director of Namelex Holdings Ltd but was unaware who exactly were the beneficial owners and financiers of that company (Footnote: ⁶⁷). He was also a director of JL Spirits & Tobacco, which failed to pay its $ 9m debt. He had himself lent money to Namelex when it was trying to get a letter of credit in 2002, trusting in Mr Hadkinson, and lost it, which was one of the reasons he ended up working for Mr Tlais.

As to the latter, towards the end of 2001 he signed a letter to Gallaher dated 22^nd October 2001 which said that Namelex was “taking forward [its] exposure to in excess of $ 100 million” on the basis that that was what he was being told by people in Namelex; and a letter to Gallaher of 9^th November 2001 which referred to extensive research trials with existing customers in the Iranian market claiming success for the hard box Stateline, which he had later learnt was untrue (the product being then still in a warehouse in Dubai), and which he had simply accepted at face value from others in Namelex.

Mr Clarke was an active participant in the plan to mislead Mr Tlais in September and December 2001. In March 2002 he told Mr Tlais that he had not been allowed to know the true situation with the free goods and had been kept away from Mr Tlais because of Mr Tlais’ supposed dislike of English people, when, on his evidence he knew of the state of the free goods account in late Summer 2001.

Some of his evidence gave a misleading impression. Thus he stated in his witness statement that on 1^st September 2001 he reassured Gallaher that a Russian letter of credit would be issued but on 3^rd September the bank’s lawyers notified Mr Nammour of a last minute problem. What he did not indicate was that a comfort letter apparently provided by the bank on 28^th August 2001, a copy of which was sent by him to Gallaher on that day, was said by the bank to be a forgery (as he knew in 2001). He also referred to discussions in early 2001 concerning the possibility of Gallaher investing in a factory associated with CT Tobacco, thereby implying a continuation of Gallaher’s involvement with CT Tobacco. He did not refer to the fact that Mr Jack had made it plain that he would not countenance such an investment given Mr Tornarides’ involvement. He suggested that Gallaher and Namelex were colluding to ensure that the price per case paid by Highstreet was higher than Gallaher’s “list price” for the cigarettes when, as he accepted, Gallaher was not aware that Namelex was not using the rebates given to it in order to provide Mr Tlais with free goods.

Mr Tlais’ command of English is quite good, but not perfect. He had, however, the advantage of an Arabic interpreter of which he availed himself whenever he needed to. On a number of occasions he displayed a marked inability to answer the question rather than engage in speeches or the repetition of points. Some of his evidence was given in terms of considerable generality where a degree of specificity was reasonably to be expected, such as his oft repeated refrain that everything had been approved by Norman Jack. Some of it was not at all easy to follow in a way which is not sufficiently explicable by language difficulties.

Mr Tlais, too, was prepared to state or sign up to what he must have realised was inaccurate or as to the truth of which he had no knowledge. For instance:

In his letter of 4^th March 2002 he referred to having invested and

Even allowing for Mr Tlais’ somewhat voluble nature and a sense of grievance, I did not regard Mr Tlais’ evidence as something upon which, in relation to disputed matters, I could readily rely.

TEL’s most significant absentee was Dr Al-Mahamid, described by Mr Tlais as his “key partner and master distributor” from whom a statement was taken, which I have also not read. No reason was given as to why he was not called and I do not propose to speculate about it. The result is that I have no evidence from him as to the controls, if any, which, between them, TEL and Adam Trading had in place. Nor do I have any explanation from him as to how goods came to be shipped to the destinations set out in the Adam Trading Schedules and payments for goods supplied by Adam Trading made to Highstreet. According to Mr Tlais’ evidence it was Adam Trading which carried out mixing of the goods; received returns; obtained signed ITPs; kept sales records to in-market distributors and might, therefore, have had a record of the intended final destination of the goods. It was, according to Mr Tlais, Adam Trading’s task to carry out due diligence on his customers and to secure compliance with the ITP. No evidence has been given by Dr Al-Mahamid as to whether, how, and to what extent he did this.

Also noticeably absent was Joseph Khatter, the TEL employee who was said to be “responsible for banking matters, payments, invoices, dealing with stock releases, typing up the releases, dealing with the warehouses” and as “holding the account, buying, stock position and dealing with warehouses”. He was said to be the source of the stock figures provided by Mr Clarke to Mr Jack and of the information collated by Mr Clarke so as to form the customer accounts (see paragraph 677 below). It was he who instructed warehouses to release goods and checked the source of funds transferred to TEL. He instructed Agathocleous to prepare the misleading financial accounts to which I refer in paragraph 670 below.

Mr Mobaraki gave TEL a witness statement but he was not called. He could have given evidence of the extent of the build-up of the Dorchester business in Iran; the circumstances surrounding the damage to the product; the loss of the business and the expenses of destruction.

The claim put forward by Mr Tlais and TEL is extremely large, even by the standards of this Court. Some of it e.g. the $ 30 million claim arising out of events in the Namelex era was obviously problematic, not only because of the waiver agreement but also on account of the want of detail of its composition. The damages claim is, on any view, grossly exaggerated. Large portions of it were wholly unsupported by any evidence. The calculations of damages set out in Schedule I to the Amended Defence and Counterclaim were, so far as factual evidence is concerned, supported by a single paragraph of Mr Clarke’s statement. The question of expert evidence in support seems to have been left until very late in the day.

There has been an imbalance (which I have endeavoured to ensure had no unfair effect) between the legal firepower available to the two sides. Gallaher has been represented by Slaughter & May and one Leading and two Junior Counsel – a level of representation which is not surprising in view of the size of the claim. Executives from Gallaher have been present throughout the trial. TEL has been represented by Picton Howell and, originally, two junior counsel, with assistance from a third. Over the long vacation TEL lost the services of Mr Hill, its leading junior, who had presented their case with great skill for the first 47 days, presumably for want of funds. Mr Alastair Tomson had to shoulder the burden of continuing in his place, which he has done with marked ability. TEL was unable to call its expert accountant because, so I was told, he had not been paid a balance of £ 137,000 that was due to him. Despite my allowance of a short adjournment to enable him to be put in funds to the extent that he required (£ 40,000) in order to give evidence, and which I was told were on their way, that sum was not provided, and he was not called.

I record these matters because I have gained from them the impression that these proceedings were launched by Mr Tlais upon the basis that, if everything was thrown at Gallaher, including allegations about which Gallaher would be sensitive, there was a good chance that Gallaher would settle in order to avoid embarrassment (Footnote: ⁶⁸); and without any measured consideration by TEL of what could be established and how, and the focused marshalling of resources for that purpose. Whilst that does not of itself mean that TEL’s claims are ill founded it does mean that I approach them with a degree of circumspection.

On 29^th December 2006 Gallaher, through Slaughter & May, gave notice that it challenged the authenticity of a large number of TEL’s disclosed documents and required TEL to prove them. Mr Tomson submitted that the authenticity of these documents had been proved by paragraph 869 of Mr Clarke’s witness statement in which he states that, after a detailed review of the sales documentation disclosed, he considered that it satisfactorily accounted for TEL’s releases of the good supplied by Gallaher to TEL. Whilst this covers some of the documents not admitted, such as sales invoices, it does not extend to others – such as the signed ITPs. Its usefulness in relation to sales documentation is however much reduced by his evidence that Mr Khatter was responsible for payments, invoices, and dealing with stock releases, and that until after the termination of the TEL Agreement, when he summarized them, he had nothing to do with the customer accounts.

Gallaher claims that it was entitled, pursuant to clause 10 (ii) of the TEL Agreement to terminate it because, at the time when it purported to do so, TEL was in material breach of several clauses of the TEL Agreement which were incapable of remedy in that TEL had failed:

Clause 10 (ii) provides that if a breach is capable of remedy no notice of termination can be given unless and until a notice has been given requiring it to be remedied “within 30 days or such longer period as may be agreed upon in writing between the parties”. It is apparent from this that the parties envisaged that a breach should be regarded as remediable, for the purposes of clause 10, only if that could be done within 30 days or any longer period which Gallaher agreed. Gallaher never agreed a longer period.

In addition Gallaher claims an entitlement to terminate because it had reason to consider that TEL was complicit in smuggling and that, in those circumstances the ITP itself entitled it to terminate the relationship.

Clause 4 (xxi) of the TEL Agreement provided:

“The Distributor will…

Conduct its business in accordance with the policy on International Trade of the Gallaher Group (as amended by Gallaher Group from time to time) and shall procure that any distributors within the Territories shall conduct business in accordance with the said policy on international trade”.

The ITP (as signed on behalf of TEL) contained a number of provisions designed to limit the risk of smuggling of Gallaher brands. In particular, it provided:

“Subject always to applicable laws and regulations, sales of Gallaher cigarettes (and other products) will only be made available to distributors, joint venture partners, licensees etc who are prepared to provide the following commitments to Gallaher that:

• They share Gallaher’s vision to build business in legitimate markets and are prepared to devote the necessary resources to develop trade in those countries;

• They will only sell products supplied to Gallaher into countries where duty will be paid (excluding duty free outlets) and that they will comply with all applicable laws and local requirements relating to the importation of cigarettes into those countries;

• They will take no action to promote or facilitate the resale of products to their customers in violation of applicable laws and regulations;

• They will not sell products supplied by Gallaher into countries where Gallaher has other distribution arrangements in place for such products or infringe Gallaher’s trademarks;

• They will not trade with those that they know are or have reason to believe are involved in smuggling cigarettes. Indeed, they will make the necessary enquiries to satisfy themselves that their customers in turn will behave responsibly; and

• They will co-operate with Gallaher in allowing Gallaher representatives to visit emerging markets for the purpose of auditing the supply chain to those markets and to inspect stocks in the possession of distributors, wholesalers and retailers.”

The ITP, as signed, required TEL to impose the same obligation on its own customers. Mr Tlais stated:

“I further confirm that I will obtain the same undertaking from any sub-distributors to whom I supply any products of the Gallaher Group”

TEL submits that the ITP is a Gallaher policy statement, which the TEL Agreement does not, either by its express terms or by necessary implication, incorporate. Some of its provisions, such as a commitment to share Gallaher’s “vision” to build business in legitimate markets, are inapt to create any enforceable legal obligation. Neither the TEL Agreement nor the ITP creates legal obligations in the terms of the ITP. Alternatively, the most that clause 4 (xxi) does is to require TEL to conduct its business in accordance with the ITP. To the extent that there are parts of the ITP which set out with reasonable clarity how the distributor should conduct its business they should be given effect. But the clause deals only with what TEL is required to do under the ITP and does not extend beyond action required of TEL itself.

The obligation to share Gallaher’s vision is insufficiently precise to give rise to any enforceable legal obligation. But much of the ITP is not of that character. The policy makes clear that sales will only be made to distributors who are prepared to provide “commitments” to Gallaher and that expression, together with the content of the required commitments, is couched in the language of legal obligation. TEL’s contractual agreement to conduct its business in accordance with the policy was an undertaking to make the commitments which the policy specified.

I reject the submission that the clause does not extend beyond action required of TEL if that submission is intended to mean that TEL cannot be responsible for the actions of others. The obligation in clause 4 (xxi) to procure that distributors within the Territory conducted business in accordance with the policy obliged TEL to see to it that those distributors fulfilled those commitments or, to put it another way, to secure that result: Re Royal Victoria Pavilion, Ramsgate [1961] 1 Ch 561; Barnicoat v Knight [2004] EWHC 330 (Ch); Nearfield Ltd v Lincoln Nominees Ltd [2006] EWHC 2421 (Ch). This was an onerous obligation.

Mr Clarke suggested in his evidence that TEL’s obligation to comply with the ITP applied to domestic duty paid goods i.e. goods shipped direct to their destination market where duty was to be paid; and did not apply to the clearance of Old Stocks in Cyprus and Dubai or the 365 day stocks dispatched to Cyprus and Dubai for the purpose of mixing (at any rate insofar as it was mixed); or to sales of damaged Dorchester supplied by TEL for the Iranian market, upon the basis that compliance with the ITP in respect of those goods was impossible, or at best very difficult, because they were old or damaged goods without banderols with English health warnings.

Since almost all of Gallaher’s sales to TEL were not shipped direct to market, the effect would be that the ITP was inapplicable to almost all of Gallaher’s sales to TEL.

I do not accept this suggestion for a number of reasons. Firstly, the Procedural Agreement, which refers to the fact that Mr Tlais and TEL had signed the ITP without suggesting that it was to be inapplicable to any of the sales specified, was not expressed to override or modify the TEL Agreement; nor must it necessarily do so.

Secondly, the TEL Agreement was amended in January 2003 without any indication that it was inapplicable to the Old Stocks. On 30th August 2002 Mr Tlais had sent an agenda for the meeting in London of 5th September 2002, item 6 of which was “Contract amendments”. A note attached to the agenda suggested that the then existing draft of an amended distribution agreement “had been overridden in principal [sic] by the new working procedure agreed between the parties and the customs” and that that procedure should be incorporated in the amended agreement. That suggestion was removed when Mr Jack re-wrote the agenda and attached a note on the distribution agreement which contained no reference to any overriding. On 4^th October 2002 Mr Jack sent Mr Clarke a paper setting out the tripartite agreement that was to become the Procedural Agreement. On 15^th October 2002 he wrote to Mr Tlais dealing with amendments to the TEL Agreement and the draft procedural agreement. In neither case was there any suggestion that the latter would replace or override the former. The Amended TEL Agreement was signed soon after the Procedural Agreement without any suggestion that its provisions were in part superseded by the Procedural Agreement.

Thirdly, in his letter of 1^st October 2004 (see paragraphs 484-487 above), which Mr Clarke drafted, Mr Tlais confirmed his awareness of his obligation to comply with the ITP and to procure that his distributors did so without suggesting that that obligation applied otherwise than in respect of “all sales” as Mr Jeffery had stated. No suggestion was made in the pleadings that the ITP was not applicable to all sales. Mr Tlais accepted in evidence that it did, that he was bound to procure that TEL’s sub-distributors complied with it, and that that was the confirmation that he intended to give Mr Jeffery in his letter.

Fourthly, there is no inconsistency between the TEL Agreement and the Procedural Agreement. Clause 3 (i) of the TEL Agreement provides that “Unless otherwise agreed (for instance, for logistical or security reasons) all brands shall be delivered by Gallaher to the destination markets in the Territories”. Clause 3 (v) obliges TEL to supply evidence of the shipment of the order to the relevant Territory where it is necessary for the distributor to make deliveries to destination markets via an intermediary port. The Procedural Agreement sets out agreements as to delivery by Gallaher otherwise than to destination markets and additional details as to what types of documentation are to be provided where deliveries are not made directly to those markets.

In the light, however, of Mr Clarke’s evidence that he did not regard TEL as bound by the ITP in respect of most of the goods supplied to it, it would not be surprising to find that TEL had not done so.

Gallaher relies in support of its allegation that TEL failed to comply with the ITP on a number of matters. Firstly it relies on the sheer number of goods supplied by Gallaher to TEL that were seized by HMCE and other customs authorities. The numbers themselves are large but they have a significance beyond themselves. As I set out in paragraphs 12-14 above most smuggling is not detected, HMCE’s estimate being that the amount smuggled is about seven times the amount seized.

HMCE notifies Gallaher of seizures of cigarettes made by it (and overseas Customs authorities). Gallaher also receives notifications from overseas Customs authorities and others. Gallaher is able to discover whether the product seized, of which it is given samples, is genuine or counterfeit and usually, at any rate in the case of UK manufactured stock, to trace the person to whom the product was first supplied.

Gallaher has an enormous database of seizures. The reliability of that database and the inferences validly to be drawn from it have been the subject of much debate. TEL disputes the reliability of Gallaher’s attribution to the category of goods supplied to TEL of goods not specifically manufactured for it. (The goods manufactured for it -coded in such a way as to identify TEL as the customer - are referred to as the “TEL coded stock”).

The key figures on which Gallaher relies are set out in the table contained in paragraph 11 which, for ease of reference, I repeat.

I consider in Appendix A to this judgment the method by which these figures have been arrived at. My conclusion is that the figures derived by Gallaher both as regards “TEL Coded Stock” and “Stock only ever sold to TEL” are a fairly reliable estimate (and certainly the best obtainable) of the amount of stock supplied by Gallaher to TEL that was seized.

I approach with a little caution the proposition that because HMCE estimates that the authorities only seize about one seventh of all smuggled goods and because the amount of TEL coded stock seized was about a fifth of total production of that stock, the likelihood is that virtually all of the TEL coded stock, other than such as was destroyed, was smuggled. Ratios applicable to the entire population of produced and smuggled cigarettes may not necessarily be applicable to individual sections. It does however seem to me likely that a considerable amount, probably amounting to well over half of the goods supplied by Gallaher to TEL will have been smuggled. If the amount seized is looked at alone, the quantity is very substantial – nearly 70,000 cases of TEL coded stock and 75,500 cases if the non coded stock is included. Even if these figures are out by a third the picture of substantial seizures and much more undetected is not radically altered.

Seizures of product supplied to TEL took place over the entire period of the TEL Agreement. When supplies of Sovereign ceased seizures of it reduced and Dorchester became, in its turn, the subject of very sizeable seizures. The size of these figures suggests that TEL had not taken adequate steps to sell only into countries where duty would be paid (excluding duty free outlets) and to customers whom they had no reason to believe were involved in smuggling and which, having made the necessary inquiries, they could be satisfied would behave responsibly, and to procure that its sub distributors did likewise.

Secondly, Gallaher relies on the Adam Trading Schedules. Mr Tlais accepted that these schedules were very likely to record actual shipments made by Adam Trading and that, at least in the main, the shipments made by Adam Trading were of stock received from TEL (Footnote: ⁶⁹). They reveal that Adam Trading was exporting large quantities of goods to destinations outside the Territories.

The question arises as to whether those destinations identified in the Schedule which are not in the Territories were, or may have been, legitimate intermediate ports i.e. ports to which the goods were carried en route between Cyprus/Dubai and one of the Territories. Some ports on the Schedules e.g. Bar in Montenegro, Illychevsk in the Ukraine, Rotterdam in Holland, Koper in Slovenia, Thessaloniki and Trieste, are hubs for legitimate, but also for illegitimate, trading. Malaysia could, it is said, have been on a route including Pakistan; Loendersloot in Rotterdam on a route to South America. But there seems no possible warrant for shipping from Cyprus or Dubai to Rotterdam or elsewhere in Europe, or to Singapore or Malaysia, goods intended for the Middle East.

Suspicion that these destinations are not true intermediate ports in a legitimate trade is heightened by what is known to have happened in one case where the goods arrived in Malaysia. A number of the entries on the schedules showing Malaysia or Singapore as the port of discharge identify M’Exim International Limited (“M’Exim”) of Singapore as the shipper. On 5^th January 2004 - a date before the relevant entries in the Schedule – Gallaher had provided TEL with a report of a raid by the Royal Malaysian Customs at Pelapas, Johor. That revealed that master cases of Sovereign and Dorchester shipped by M’Exim had been repacked into a larger carton used to pack loose furniture and that the cartons were to be declared to Customs as furniture for export (according to an informant, export to the UK). Either TEL failed to inform Adam Trading of this information or Adam Trading ignored it and continued using or supplying M’Exim as shipper.

The evidence also reveals that some of the goods were sold ex warehouse in Rotterdam e.g. a sale by Adam Trading in July 2003 of 950 cases of Sovereign in Rotterdam to Pearlion Overseas Trading Ltd, and a sale of 1,000 cases of Sovereign Classic and 150 cases of Sovereign Classic Lights to Metco, ex Loendersloot with the full flavour goods then being shipped by Metco to Montenegro, payment being made to Highstreet. In March 2002 Highstreet received a transfer of $ 69,090 under a note “1010 Dorchester for Pearlion less USD 16760 for our costs”)’ There is also evidence of 2,900 cases (which appear on the Adam Trading customer account) being sold by Adam Trading C & F Rotterdam, again with payment to Highstreet.

Both of these types of sale are inconsistent with the ITP, which calls for goods not to be sold into countries where Gallaher has other distribution arrangements. If goods are sold by Adam Trading ex warehouse Rotterdam or are sold by Adam Trading to a customer C & F Rotterdam, they will have been sold into Holland, whether or not they have become subject to duty. Their ultimate destination will then depend on the terms of a subsequent sale. In addition the goods were not being sold to a distributor in a duty free zone but delivered to a bonded warehouse.

The Schedules also show a number of shipments of Gallaher cigarettes made by Adam Trading to Iraq during the period when UN sanctions were in place (i.e. until 22^nd May 2003), although it is not possible to establish whether these are TEL goods. The fact, however, that Adam Trading was making shipments in breach of sanctions show Adam Trading’s preparedness to make unlawful shipments.

If Dr Al-Mahamid had been called, it may be that he could have shown that some or all of the destinations on the Adam Trading Schedules that are not in the Territories were true intermediate destinations for final destinations within the Territories. But he was not, even though I was told during the trial that he was to be called. Nor was documentary evidence produced which established that the shipments shown on the Adam Trading Schedules were sales to some legitimate final destination via a true intermediate port.

In the light of (i) the agreement between the experts that it is normal for a master distributor to ship CIF to the end market; (ii) the unlikelihood, as it seems to me, that ports of discharge in as diverse places as Malaysia, Singapore, Montenegro, Bulgaria, Latvia, Ukraine and Miami as well as Rotterdam were all intermediate ports to which the goods were taken en route to one of the Territories; (iii) the absence of any explanation for the relevant destinations on the schedules from Dr Al-Mahamid (or Mr Tlais or Mr Clarke); and (iv) the cases of Midwinter, Metco and Alsharq referred to in paragraphs 622-631 below, I infer that Adam Trading was engaged in making very substantial shipments of goods to territories outside those specified in the TEL Agreement without regard to any of the restrictions under the ITP and that, in respect of some of these shipments Adam Trading was selling into countries where Gallaher had other distribution arrangements or had reason to believe that the recipients were engaged in smuggling, and that it failed to make the necessary inquiries to satisfy itself that its customers would behave responsibly.

I further infer that Mr Tlais must have known that such shipments were being made (even though he may not have been aware of each one) and that they were inconsistent with his obligations under the TEL Agreement and Adam Trading’s obligations under the ITP. He and Dr Al-Mahamid were very close and their fortunes interdependent (Footnote: ⁷⁰). As Mr Tlais put it:

“I used to talk to Khaled in daily basis, daily basis, maybe two or three or four or five times per day, sometimes. And sometimes in the night, to tell me exactly where it is going and what he is making and what he is doing. The shipment and everything”

In a number of cases Highstreet was receiving payment into its bank account from Adam Trading’s customer. I regard it as unlikely that Mr Tlais was unaware, even if only in broad terms, of the shipments that Adam Trading was making or that he was simply told that payments would be made to Highstreet by Adam Trading’s customers without being aware that what were being paid for were goods that TEL had supplied.

If I am wrong on that and Mr Tlais was in fact in ignorance of the shipments by Adam Trading to destinations outside the Territories, TEL nevertheless failed to procure Adam Trading to conduct business in accordance with the ITP. Even if TEL’s obligation had been only to use best endeavours to see that Adam Trading complied with the ITP it is apparent that TEL failed to do so. Mr Tlais’ evidence appeared to indicate that he regarded it as sufficient for him to require Adam Trading to sign the ITP and to tell Dr Al-Mahamid to check what its distributors were doing. As he put it:

“I have done my duty. Adam Trading has sign the ITP, I have given my order, and my instruction also he has to follow the customer. I cannot follow everything myself.”

“I told you, all the time, my instruction to Mr Adam Trading to be sure about his distributor. I cannot tell you more than that.”

That was not sufficient. TEL needed to have arrangements in place with Adam Trading whereby Adam Trading could and would (a) demonstrate to which customers they were selling and with what ultimate destination; and (b) produce documentation to vouch for it. In the case of an intermediate destination that would involve documents showing not only the arrival of the goods at, but also their onward passage through the intermediate to the final destination. Without doing any of that TEL could not procure (except by chance) Adam Trading’s compliance with the ITP, or fulfils its own obligation under the ITP to make the necessary inquiries to satisfy itself that its customer would behave responsibly.

Thirdly Gallaher rely on what happened (as it learnt after March 2005) in the case of certain specific consignments of cigarettes to entities known as Midwinter, Metco and Andalus Alsharq. What happened in relation to those goods is, it is suggested, indicative of a pattern of conduct or inaction by TEL and Adam Trading.

Midwinter is a company based in Madeira, owned or controlled by Mr Pascal Barakat. Midwinter purchased 7,000 cases of Dorchester from Adam Trading in June and July 2004. Adam Trading shipped the goods from Jebel Ali, Dubai to Rotterdam. The goods were stored in the Loendersloot bonded warehouse in Roosendaal, The Netherlands. Payment for the goods was made partly to Adam Trading and partly to Highstreet via an escrow account at the Loendersloot warehouse (Footnote: ⁷¹). Mr Barakat was not asked to sign the ITP and no restrictions were placed on the final destination of the goods: as he confirmed to Mr Espin, and as his solicitor confirmed in a letter to Slaughter & May of 30^th August 2005. Mr Barakat was not called at trial but that does not cause me to reject what he and his solicitor have said. His letter to Mr Espin of 27^th April 2005 complains that the goods were spotted. But that would not justify a sale to him without restriction.

Metco is a company based in Cyprus. In October 2005 Gallaher obtained a file of documents relating to sales to it. The file included Bills of Lading, Adam Trading invoices and payment advices. Those documents evidence 15 separate transactions involving shipments of over 20,000 cases of cigarettes over an 18 month period from May 2002 to November 2003. The goods were shipped by Adam Trading to Belgium (Antwerp and Hawe), Montenegro, The Netherlands (Loendersloot), Singapore, Slovenia and Tenerife. None of these were TEL territories. Metco made payment for some of the goods to Highstreet via its Loendersloot escrow account (Footnote: ⁷²). Mr Edwin Cotran of Asmar Holdings, the owner of Metco, confirmed to Mr Espin that no restriction had been imposed upon Metco as to the final destination of the goods. It was suggested to Mr Espin that Mr Cotran had never said that, not least because there was no note of the conversation and no reference to it in his witness statements. I am satisfied that Mr Cotran did say that; and that Mr Espin obliquely referred to it when he said, at paragraph 68 of his first statement that “it is also apparent that Adam Trading imposed no restrictions on where Metco could sell the goods”.

Cigarettes sold by Metco have been seized in the UK. On 15^th December 2005 at the Maidstone Crown Court five men were convicted of smuggling offences. According to press coverage, and information derived from attendance at court by a Gallaher representative, on at least one occasion the men had purchased Gallaher brand cigarettes from Metco. From the markings on the pack it was found that the goods had originally been sold by Gallaher to TEL (Footnote: ⁷³). The goods had been imported into the UK under duty suspension for re-export to Dubai and Togo. When the containers arrived in the UK the cigarettes were unloaded and replaced with photocopying paper which was what was then sent to those destinations. The cigarettes, or some of them, were later found on a lorry in Kent. Given the shipping documents showing sales by Adam Trading to Metco via Loendersloot it seems likely that Metco bought these cigarettes from Adam Trading.

I shall assume that Metco had nothing to do with the criminality. Even so, the sale by Metco of what ended up being smuggled arose as a result of Adam Trading’s failure to place any restriction on the sale of the goods. The fact that Metco appears on a customer list provided by Gallaher to HMCE in February 2003 and on another such list in April 2004 (Footnote: ⁷⁴) does not reduce the significance of that lack of restriction.

In August 2002, in response to an inquiry from Gallaher about a shipment of 778 cases ex Cyprus by Adam Trading to Gia Tauro with no declared end destination, Mr Tlais pointed out that the goods were never shipped by Adam Trading and produced a bill of lading showing Metco to be the shipper and Bar as the port of discharge. This appeared to distance Metco from Adam Trading. As is now apparent, these goods had been sold to Metco by Adam Trading, the price including the ocean freight. According to the Adam Trading invoice payment was to be made to Highstreet. The application for a shipping order made by Atteshlis Bonded Stores indicated that Bar was a transit port.

Mr Tlais’ evidence was that he had carried out an investigation which concluded that Adam Trading was not the shipper. That was true as far as it went. But it seems to me likely that he discovered, or could without difficulty have discovered, the sale from Adam Trading (from whom he must have obtained the bill of lading) to Metco, that Bar was a transit port and the ultimate destination. In either event he should have provided a fuller explanation. That he did not do so shows a lack of engagement with the process of tracking seizures and a failure to satisfy himself that Adam Trading was behaving responsibly..

Andalus Alsharq General Trading LLC (“Alsharq”), a Dubai based company, purchased more than 30,000 cases of Gallaher brand cigarettes from Adam Trading between 2003 and 2005 for Iraq. In a letter of 9^th October 2005 Alsharq confirmed to Gallaher that it had not been asked at any stage to sign the ITP and no restrictions had been imposed on it in respect of the onward sale of the products. I regard this as likely to be so (and of a pattern with the position in respect of Midwinter and Metco). I do not regard what Alsharq said as unreliable because it approached Gallaher with a view to becoming a potential distributor for Iraq. It is right to records that the same letter states that Alsharq’s market was “very much prevalent in Iraq”.

TEL has produced what purports to be the second page (undated) of the ITP stamped by Alsharq, in which no market is specified. The stamp is similar to a letter from Alsharq to Gallaher of 4^th August 2005. This is one of the documents the authenticity of which has been challenged. I do not regard its authenticity as either proved or disproved.

Gallaher submits that TEL and Mr Tlais must have been aware of these three sets of sales by Adam Trading in the light of the closeness between Mr Tlais and Dr Al-Mahamid and the fact that, in the case of the Midwinter and Metco sales, payment was made to Highstreet. I accept that submission. TEL was in breach of its obligation to procure that Adam Trading complied with the ITP - by not selling products into countries where duty would not be paid or where Gallaher had other distribution arrangements and by making the necessary inquiries to satisfy itself that its customers would behave responsibly. If TEL was not aware of these sales, it was also in breach of its own obligation to make such inquiries in respect of Adam Trading. Further clause 5 (iv) requires TEL to resell the Brands only where there is no reasonable cause to believe that the purchasers will sell them outside the Territories. A sale without restrictions would, where the destination intended by the purchaser was not known to be within the Territories, be likely to afford reasonable cause to believe that a sale would take place outside them.

TEL points out that it red carded a number of customers during the currency of the TEL Agreement (e.g. TSS Tutun Sigari, Drilon, Houmouz Marine, and a Yemeni and Saudi distributor), and voluntarily changed a Libyan distributor because of concerns about him. It also points out that efforts to track down smuggling routes were hampered by the following:

TEL submits that the proper inference to be drawn from the quantity and volume of seizures of a customer’s product depends on the circumstances in which the customer in question is required to trade. In the present case the most important circumstances, they submit, are :

In deciding what inferences are to be drawn from seizure volumes it is necessary to pay proper regard to factors which may explain those seizures consistently with fulfilment by TEL of its contractual obligations. Damaged or poor quality goods (as some of the Old Stock and Dorchester was) represent more of a control risk than goods in pristine condition. A brand which is already attractive to smugglers is likely to remain so if the factors that make it attractive (e.g. English get up and global English health warning) remain, as with Sovereign they did. The Procedural Agreement recorded agreement with Mr Tlais’ observation that he believed that, in the short term, there would continue to be product diversion of Sovereign.

These considerations do not, however, sufficiently account for the very high incidence of seizures both of Sovereign and Dorchester and its continuation over the whole length of the TEL Agreement and across the Territories. The fact that a product has become attractive to smugglers does not mean that it must stay smuggled in large quantities. Much depends on the degree of control exercised by Mr Tlais and his sub-distributors, whose compliance with the ITP he agreed to procure, and the selection by them of the persons with whom they dealt. Smuggling is, in large measure, a function of availability. One likely reason for the incidence of smuggling in the Namelex era was the laxity of control exercised by Namelex. If control is exercised properly e.g. by getting distributors to sign the ITP and monitoring what they are doing with the product, smuggling of the brand will decline (Footnote: ⁷⁵). Mr Tlais told Gallaher that he would be able to bring Sovereign under control in a period of 12-18 months.

Nor does the fact that product is sub-standard (which may make it something that a distributor wishes to dispose of but will also make it less attractive to many consumers in a high duty area), or sold into non-core markets, mean that it will be smuggled. Again much will depend on the degree of control. It is noticeable that Mr Tlais’ position in October 2002 was that all of his sales, including those into core markets, were ITP compliant and made to distributors who had signed the ITP.

TEL also submits that the figures for seizures of product supplied to TEL should be reduced or certain seizures discounted. So far as reduction is concerned TEL suggests that little weight should be attached to the overseas notifications because they were not supplemented by the track and trace procedure and they may be less reliable. TEL then observes that, if you take the seizures notified by HMRC only, then, on Gallaher’s figures, the HMRC seizures represented 11.2% of all goods said only ever to have been supplied to TEL. Sovereign seizures represented 12% of Sovereign supplied to TEL. Dorchester seizures represented 9.1% of Dorchester supplied to TEL. These figures should then be reduced to take account of the fact that the termination at the beginning of 2005 exacerbated already high control risks so that only seizures up to 2004 are relevant. In that case the relevant percentages are 7.4%, 8.4% and 5.2%. If reliance is placed only on goods pack coded for TEL (i.e. no account is taken of the 365 day goods) then the relevant percentages up to the end of 2004 are 6.3%. 7.2% and 5.2%. The figures are reduced even further if you ignore 25% of seized volumes on the ground that they are volumes to which Gallaher has applied assumptions about attribution, which TEL claims are unjustified.

I do not accept this approach. The information obtained from overseas’ notifications was put into the database when received and I see no reason to regard its quality as being significantly less reliable than that supplied by HMCE. Nor do I see any good reason to leave the 365 day goods out of account. Termination of the TEL Agreement may reduce the diligence with which distributors in the chain control it but I do not regard that as a reason for ignoring seizures after 2004 altogether.

TEL also submitted that seizures of goods bound for Mozambique are attributable to OTI or Gallaher because Gallaher decided to supply OTI in Durban as the South African distributor directly. Gallaher did its own market visits and decided what orders should be accepted, paying TEL only a commission on sales.

The disclosed documents contain only one invoice from TEL to Gallaher for commission in respect of 3,080 cases. All the other sales were from Gallaher to TEL and then from TEL to OTI. In other words, OTI was TEL’s customer (although in some instances Gallaher shipped the goods to Durban direct) and was invoiced by TEL. Since OTI was TEL’s customer, TEL was obliged by the TEL Agreement to procure that OTI complied with the ITP (as with any other customer). This is borne out by a letter from OTI to Tlais Trading of 3^rd December 2003 in which Mr Nathan, OTI’s chairman, warns Mr Tlais that Gallaher is seeking to do business with OTI direct, rather than indirectly via Cyprus. The letter refers to more than two years of dealing with Sovereign at Tlais’ request and OTI having gone the extra mile in all its dealings with Tlais Trading in an attempt to create the kind of relationship “that we enjoy with all our Major International Principals”.

TEL also submits that no account should be taken of seizures of goods manufactured for the Syrian market in June and August 2002. TEL red carded TSS Tutun Sigari and, having acted diligently, should not – TEL submits - have any such seizures held against them. Again, it was TEL’s obligation to procure that its distributor complied with the ITP (Footnote: ⁷⁶). Even if these seizures are ignored on account of the fact that TEL red carded the customer the quantity involved does not affect the overall picture.

In short, I regard the important figures as those set out in paragraphs 11 and 606 above. Taking into account (a) the very high level of seizures; (b) the likelihood, in the light of those seizures, that well over 50% of the cigarettes supplied to TEL ended up being smuggled; (c) the evidence of the Adam Trading Schedules; and (d) the specific instances of Midwinter, Metco and Andalus, I am satisfied that TEL was in serious and continued breach of its obligation to conduct its business in accordance with the ITP and to procure that any distributors within the Territory did likewise. TEL’s failure to produce adequate documentary records of its sales/dealings and Mr Tlais’ conviction only serve to confirm that view. If TEL had fulfilled its obligations in this respect the likelihood is that there would have been a much lower level of goods smuggled and of goods seized and there would not have been the wholesale distribution of Gallaher’s cigarettes to destinations outside the Territories exemplified by the Adam Trading Schedules.

Because what occurred in the distribution chain below TEL is not patent, it is not possible to identify TEL’s individual breaches, particularly insofar as they consist of a failure to procure that Adam Trading and others of its distributors conducted business in accordance with the ITP. Essentially there was a failure of control of the distribution either by TEL or Adam Trading (or other distributors) as a result of which Gallaher products could with relative ease be resold into countries where duty would not be paid and to countries outside the Territories or to persons whom there was reason to believe were smugglers. Neither TEL nor Adam Trading can have made the necessary enquiries and taken the necessary steps to satisfy themselves that their customers would be behaving responsibly. In particular there was no sufficient record from which it was possible to discover at any given time where the stocks supplied to Adam Trading were, where they were intended to go, and where they had gone.

The penultimate paragraph of the ITP reads as follows:

“In the event that Gallaher discovers that any particular distributor has been shown to be behaving improperly or Gallaher has reasons for believing that they may be, Gallaher will re-visit that trading relationship with a view to discontinuing that relationship, if appropriate. In particular, if Gallaher concludes that any distributor is a smuggler it will terminate that trading relationship with immediate effect. In turn, Gallaher will expect its distributors to endorse a similar policy in respect of their customers.”

Gallaher’s case

Gallaher contends that it had very good reason for believing, and did believe, that TEL was behaving improperly, those reasons including the following:

In the light of that belief Gallaher re-visited the trading relationship, when on 4^th March 2005 the relevant Group Board Committee met and considered TEL’s failure to control the goods supplied to it and Gallaher’s suspicions of TEL’s involvement in smuggling and its breaches of contract. The Committee resolved to discontinue the relationship.

TEL contends that the provision of the ITP set out in paragraph 646 above do not confer on Gallaher any right to terminate the TEL Agreement. Any such right must be found in that agreement alone. Gallaher’s statement of its intentions (“Gallaher will re-visit that trading relationship”) does not absolve it from the consequences of a termination that turns out not to be justified.

The parties, cannot, as commercial concerns, have intended to confer on Gallaher a right to terminate a long term distributorship agreement without compensation simply because Gallaher had reason to believe that TEL might be acting improperly and Gallaher considered it appropriate to do so; nor that TEL’s fate should be determined by the application of so wide and uncertain a criterion as impropriety; nor that Gallaher should be the sole judge of what was appropriate. The ITP is not incorporated into the TEL Agreement – see paragraph 593 above, and, in any event the ITP does not provide that, if Gallaher terminates the TEL Agreement, it can do so without liability.

The ITP was not incorporated into the TEL Agreement. But the ITP, taken with Mr Tlais’ subscription on TEL’s behalf, to it in the statement - “I have read the above policy and confirm that I understand it and will be bound by its terms in all dealings with companies of the Gallaher Group” - entitled Gallaher to terminate the TEL Agreement if:

I do not regard the concept of impropriety, or the proposition that Gallaher should be entitled to act, if it had reason to believe that TEL might be guilty of impropriety and if it thought it appropriate, as so startling that the parties cannot have intended it. This is particularly so given that the TEL Agreement was drafted in circumstances where Gallaher was, and was known to be, eager to stamp out smuggling and to be in a position to part company with a distributor who might be a smuggler. Nor do I accept that the ITP did no more than state that Gallaher would consider termination if it had reason to believe that TEL was behaving improperly but would have no right to do so (save that given in the TEL Agreement) if, having reason to hold that belief, it discontinued the relationship.

Gallaher believed that TEL either was complicit in smuggling or had at least shown a reckless lack of control which was improper. As Mr Keevil put it:

“As a result of the …[Adam Trading Schedules] it was clear by mid-February that the reason for the extremely high level of seizures ….could only be explained by the lack of control exercised by TEL over its customers and, in particular ….Adam Trading. While the lack of control and management was the obvious inference to draw from the seizures [the Adam Trading Schedules] provided confirmation that the inference was correct and indeed showed that the failings by TEL were not merely the result of a lack of care, but most probably the result of deliberate complicity in smuggling..”

See also Mr Rolfe’s statement to similar effect:

“[The Adam Schedules were] clear evidence ..not just that [TEL] had failed to take proper steps to control the goods, but .. they had been at least reckless in the way they sold, and potentially complicit with smugglers”.

As was his oral evidence:

“What we were seeing on the face of it was evidence of shipments to a whole variety of ports where we had not received any documentation to support any rationale as to why [they] were going there. On the face of it, they were wholly incompatible with shipping to the markets in question and we believed they were evidence of malpractice by Adam Trading at least and given the close relationship with Adam Trading and Tlais, cast grave concerns about Tlais’ complicity in those arrangements.”

The first three matters set out in paragraph 647 above gave Gallaher reason to think that TEL had behaved improperly. So far as the level of seizures is concerned Gallaher thought – erroneously – that the level of seizures was 74% of all genuine seizures by HMCE in 2003-4. That is what Mr Keevil told the Board on 9^th December 2004, citing “Measuring and Tackling Indirect Tax Losses – 2004”. In fact, as I have said, the seizures represented 74% of all genuine UK brands seized: see Figure 3.1.

TEL submits that the internal processes by which Gallaher generated seizure statistics have been shown to be so poor that Gallaher had no reason to believe that they pointed to impropriety. Importantly, the figures which Gallaher had in March 2005 were greater than those upon which they now rely. But even the lesser figures relied on at trial give rise to an inference of complete lack of control. Those figures, when taken with the evidence of the Adam Trading Schedules, of which no satisfactory explanation has been given, are sufficient to justify such a belief. The reasonableness of that belief is not displaced by the fact that Sovereign had become a much smuggled brand, that there had been damaged Dorchester sold off in non core markets and that Mr Tlais had been engaged in the clearance of the Old Stocks.

I deal with TEL’s failure to provide sales reports in paragraph 739 below. In other circumstances these might be treated as just a failure and no more. In the light of the level of seizures and the Schedules, the failure to account for sales made supported, or, at the least, did nothing to dispel, the inference of a lack of control.

The matters upon which Gallaher relied under head (iv) as justifying its belief do not take the matter much further and I do not propose to address them.

Accordingly I conclude that Gallaher was entitled to terminate the TEL Agreement pursuant to the ITP and TEL’s subscription to it.

The third breach relied upon is a breach of clause 4 (viii) by which TEL agreed that it would keep:

“full, proper and accurate accounts and records showing clearly all sales transactions and inventories relating to the Brands and all services rendered by the Distributor pursuant to this agreement and will produce the same to GI or its duly authorised representatives upon reasonable notice. The Distributor shall retain all such accounts and records for at least six (6) years or more if required by applicable law”

There is an issue as to whether the clause requires one or two forms of documentation i.e. whether the obligation is to keep a form of documentation which can be compendiously described as “accounts and records” or whether it is to keep (a) accounts and (b) records. In the latter case the question is whether the adjectives “full, proper and accurate” apply only to the accounts and the obligation to “show clearly all sales transactions and inventories relating to the brands” applies only to records, or whether the adjectives and the obligation apply to both.

In my judgment TEL is bound to keep both accounts and records, each of which are required to be full, proper and accurate and which, between them, show clearly all sales transactions and inventories. Accounts and the records from which accounts are prepared are recognisably distinct things. That is so as a matter of ordinary language. The distinction also appears in the English Companies Act 1985, which by section 221 requires every company to keep “accounting records which are sufficient to … enable the directors to ensure that any balance sheet and profit and account” prepared under the relevant Part complies with the requirements of the Act. It also appears in the Cypriot Companies Law, section 141 (1) of which requires the directors to ensure that “proper books of account are kept that are deemed necessary for financial accounts” in accordance with the Law.

I see no reason to depart from that construction in favour of a composite form of documentation that can be described as “accounts and records”, the ambit of which is not clear, or to limit the application of the adjectives or the “show clearly” phrase to the accounts. This is particularly so given the context in which the TEL Agreement was made namely that Mr Tlais would:

“procure for Gallaher full transparency over the financial management of the business, including without limitation, the management of your banking facilities in order that Gallaher might gain comfort that your position is improving in line with the agreed plan”: paragraph (vi) under ‘Banking Matters’ of the letter of 29^th April 2002.

That does not mean that the accounts and records will involve duplication. By their nature they will contain different things.

In order for the accounts and records to be “full and proper” and to show “clearly” all sales transactions and inventories, they would need, in my judgment, to be such as would make it possible to identify in respect of the Brands:

I reach that conclusion for a number of reasons. Firstly, some of the information set out above would be essential for any form of record and account of sale transactions and inventories. Secondly, the parties clearly showed by the language that they used that they did not intend TEL’s obligations to be restrictively construed. The accounts and records were to be “full, proper and accurate”. They were to show sales transactions and inventories, not just sales and stock figures.

Thirdly, the TEL Agreement imposes on TEL a number of obligations the fulfilment of which would require it to monitor sales and inventories in considerable detail. Thus, TEL was obliged to ensure that its ordering and stock controls were such that the Territories were adequately stocked to meet in full the demand for the brands: clause 4 (ix); to agree sales targets for the ensuing 12 months on a quarterly basis: clause 4 (xi) (a); to maintain minimum stock levels for the brands: clause 4 (xv); to provide all services necessary for the efficient distribution, sale and promotion of the Brands: clause 4 (xviii); and to comply with the obligations contained in the ITP to sell only into countries where duty will be paid and the goods would comply with all applicable laws; and to make necessary inquiries to satisfy themselves that their customers would behave responsibly. Accounts and records which had the characteristics that I have mentioned would be needed to comply with those obligations.

Fourthly, as I have said, the parties contemplated that TEL’s records would have a high degree of transparency.

Fifthly, so far as stock is concerned, in the absence of information from which the value of stock can be derived it is not possible to calculate opening and closing stock values; without which it is not possible to prepare annual accounts.

Both Mr Tlais and Mr Clarke accepted that TEL did not during the TEL era keep accounts which showed the financial position of TEL. The reason, according to Mr Tlais, was that all the money received went to Highstreet.

There are no relevant audited financial statements for TEL. There is a document which purports to be an audited financial statement for the period from 1^st November 2002 to 31^st December 2003, prepared by C. Agathocleous & Co (“Agathocleous”) on, according to Mr Tlais, the instructions of Mr Joseph Khatter, TEL’s administrator/accountant. It plainly does not reflect the true size of TEL’s business.

As Gloster J put it in a judgment of 20^th September 2006:

“The only accounts disclosed by TEL to GIL as part of the disclosure process are for the period 1 November 2002 to 31 December 2003. These show negative working capital as at 31 December 2003 and total assets of only about $ 12,800. However, what is particularly significant is that the accounts do not appear to reflect the business of the company; they show only some modest fee income when they should, on TEL’s own case, reveal millions of dollars’ worth of cigarette sales resulting in about $9 million profit for the 2002-03 period. However these sales and alleged profits are not recorded anywhere in the accounts. It is clear to me that the accounts as presented to this court do not appear to show anything like a true and fair view of TEL’s financial position, if indeed it was the entity that was carrying on the business referred to in the defence and counterclaim. The absence of other accounts or financial information to support TEL’s trading position is also a matter for concern in view of its extensive claims for alleged loss of profits and other business losses.”

The account refers to “fees receivable” of C £ 85,435 and to administration and finance expenses of C £ 84.134. What these fees are is wholly unclear. It may perhaps be that these accounts were drawn up on the footing that Highstreet had received all the money and TEL was only retaining a fee.

There is a set of unaudited accounts for the period from 25^th April 2002 to 31^st December 2005 prepared by Agathocleous but unsigned by the directors. These accounts, which are irreconcilable with the accounts referred to in paragraph 670 above, reveal a loss over the period of US $ 32,082,221 on sales of US$ 32,895,359. No opening stock is specified. The notes show an inventory of zero, a figure of $ 8 million as “provision for impairment of stocks” having been written off against a figure of the same amount for “Finished goods”. The $ 8 million is said to represent 160,000 cases purchased at $ 50 per case. Mr Clarke’s evidence was that this information was (a) inaccurate and (b) supplied by Mr Tlais. Another note to the accounts writes off $ 15,435,935 of trade receivables.

These accounts are undated but were, as I understand it, produced together with their accompanying workings in 2006 and early 2007. They were prepared at least in part on the basis of information supplied by Mr Clarke the nature of which has not been revealed. The experts are agreed that these accounts are not prepared from TEL’s books and records as disclosed and should not be relied upon as a record of TEL’s historic trading performance.

There have been disclosed no overall summaries of account balances derived from any accounting system, or books of prime entry. There has been disclosed what has been described as a “cashbook”. This is not what an accountant would describe as a cashbook, i.e. a record of cash receipts and payments which can be reconciled with banking documents. It is a list of expenses that TEL alleges it incurred covering most of the overhead expense categories that TEL would be expected to incur.

In the light of the above TEL was in breach of its obligation to keep full proper and accurate accounts.

TEL has produced a number of customer account statements. These list sales made and cash received from individual customers. They are not primary accounting documents (Footnote: ⁷⁷). They are summaries prepared by Mr Clarke after the TEL Agreement was terminated and after Mr Khatter had left TEL. They detail for each customer to which they relate, the date, volume, price and brand of cigarettes sold; and record cash receipts from customers (Footnote: ⁷⁸). They do not show the final destination of the goods sold (information which TEL did not have) nor do they provide a link to the shipping documents. Goods released to Adam Trading, which account for 385,781 out of the 550,000 cases on the customer accounts, could, as Mr Tlais accepted, have gone to any one of a dozen or more territories.

The underlying documents from which the customer accounts were created had been compiled and kept by Mr Khatter. The documents from which Mr Clarke made his summaries included print outs from a desk top PC. The contents of that PC have not been disclosed. Mr Khatter printed these documents out almost every day. They apparently gave details of the last three or four transactions (with date, product, number of cases, price and total), details of payments received and the balance for each customer (so that a lot of duplication was involved). In the absence of the underlying material it is impossible to tell whether the contents of the customer accounts are complete or accurate, or whether, for instance, any apparent sales have been reversed. Nor can their accuracy as a summary of all relevant sales be verified by reference to other documents. TEL’s’ own expert identified numerous instances in which he could not match entries in the customer accounts to any documents.

Once he had compiled the summaries Mr Clarke threw the underlying documents away. This occurred after the commencement of these proceedings. I accept Mr Clarke’s evidence that he did this because he thought that the documents were duplications and did not need to be retained. But he should not have done so. The destruction of the documents has meant that it is not possible to check whether his summary accurately reflected the contents of the base material from which it was compiled.

Even if the customer accounts are accurately derived from the underlying material, they are not records that clearly show all sales transactions, nor are they full and proper. Mr Tlais’ evidence was that the customer accounts showed the release of the goods and that the price recorded in them was not the final price, which was agreed only when the customer had sold the goods on. The customer would then “take his expenses and very small profit for him and then [TEL] receives the balance”. Mr Clarke’s evidence was that the price that was to go in as a debit entry in the books was agreed at the point of release. The evidence of both Mr Clarke and Mr Tlais was that payment would become due when the goods were sold by the customer.

The customer accounts have odd features. For instance, the Parsian Fougan account stops in August 2002 although Parsian Fougan remained the principal Iranian distributor long after that. The total of the goods supplied to Iran is said to be the product of sales to Parsian Fougan recorded in its customer account (60,000 cases) and such of the sales to Adam Trading as were destined for Iran. But it is impossible to identify which of the sales in the Adam Trading customer account were destined for Iran; and the only figure identified in Mr Clarke’s witness statement as sales by Adam Trading to Parsian Fougan (5,631 cases of Dorchester) is too small.

Adam Trading was said by Mr Clarke to have kept records of sales, to which TEL had access, and I am prepared to accept that it did. The form and content of those records (save insofar as they are contained in the Adam Trading Schedules) are unknown. TEL did not have copies and had not asked Adam Trading for them.

There are no sales and purchase ledgers and there is no nominal ledger. An invoice appears to have been prepared if needed for a letter of credit; but otherwise the amount due was simply added to the customer account. As a result there are very few TEL or TEL related invoices. The invoices disclosed total about $ 4.66 million and represent less than 10% of the sales recorded in the customer accounts. A number of those are from Highstreet or Tlais Trading Company Ltd or are invoices to unknown customers. The TEL invoices raised to identified TEL customers for Gallaher brands the subject of the TEL Agreement total $ 2,074,700.

Such invoices as were disclosed were the subject of the notice of challenge to which I referred in paragraph 586. One set of invoices on the paper of Tlais Trading Company Limited shows the price due as $ 30 per case. That is the price used in the letter of credit for the relevant goods but the customer account statement refers to $ 60 as the price per case. Either the customer account statement is wrong or the price was not wholly paid by the letter of credit. In that event the certificate of authenticity stating that the amount invoiced is the full price is misleading.

At one point in his evidence Mr Clarke stated that TEL’s compliance with its obligation to keep records of all sales transaction was constituted by “the warehouse releases, and the fact that the customers were being charged”. The disclosed release instructions to the several warehouses (the authenticity of which was disputed and not proved) do not identify the goods being released other than by the brand (so that there is no way in which the age or codes of the goods can be known), and hardly ever provide any indication of the intended final destination of the goods.

Mr Clarke’s evidence was that he was not involved in releases but he believed that either Mr Tlais or Mr Khatter would telephone the warehouse and give them details of the destination of the goods to be released, or the code of the goods to be released (which would relate to a particular destination), and the written instruction would follow, but without those details. Mr Tlais’ evidence was that it was not he who did this. He would tell Mr Khatter that he wanted goods to be released to a particular destination and Mr Khatter would tell the warehouse that the goods were for that destination, or would give instruction for goods of a particular code to be released.

I have considerable doubt as to the extent to which Mr Khatter told the warehouse of the destination of the goods. If the warehouse was to be given the destination information I see no reason why it should not have been included on the written release instructions. Mr Tlais said that his instructions were that the release instructions specifying the destination should always be given in writing. I doubt that too. Even if it was so, Mr Khaterr did not comply with those instructions. Further, releases in respect of 7,850 cases cannot be matched to any record of sales, whether on an invoice or a customer account.

TEL has disclosed a number of bills of lading (the authenticity of a number of which has been challenged). Some do, but most do not, contain an indication of the final destination of the goods shipped, if different from the port of discharge. The bills often failed to record the brand shipped.

In the light of the matters set out above it is plain that TEL failed to keep records showing clearly all sales transactions let alone full, proper and accurate ones. The records Mr Khatter kept did not show clearly all transactions. On the contrary they showed a notional price, not in fact due until a sub sale had taken place, and then in all probability not in the amount specified. Wholly inadequate records were kept of the intended destination of the goods sold to purchasers from TEL.

So far as stock records are concerned, TEL stored cigarettes in seven different warehouses during the TEL period. There were three principal ones (i) A Georgiades Bonded Stores Ltd – in Cyprus; (ii) Thomsun Mercantile Marine LLC – in Dubai; and (iii) Atteshlis Bonded Stores – in Cyprus. TEL’s documents do not reveal anything which an accountant would recognise as an accounting system in respect of stock nor any summary records derived therefrom.

There are six letters (“stock reports”) from Mr Clarke to Mr Jack reporting the balance of the stocks that TEL held on specific dates: see the second and third columns of the following table:

The letters do not identify the brand of the goods or which goods were TEL coded. Nor do they identify the date of production of any of the stocks, their destination codes, whether they were pledged, or their value.

Gallaher’s expert accountant was Mr Angus Pollock. I found him a highly competent and impressive witness, in whose evidence I could, once I had mastered it, place considerable confidence. He was unable to reconcile the data in the stock reports with the movements in stocks apparent from Gallaher stock shipment records and TEL’s disclosed documents showing stock releases. His attempt to effect the reconciliation required the making of certain assumptions as to when goods would have been received into or released from the warehouse (Footnote: ⁷⁹). The “Calculated stock balance” in the above table is the balance that Mr Pollock derived from the data in those documents (Footnote: ⁸⁰). (Mr Clarke thought that some of his reports included some old stocks owned by Adam Trading)

There are also in the disclosed documents some stock reports from individual warehouses. TEL does not seem to have had or kept a complete set of stock certificates from all of the warehouses that it used in Cyprus and Dubai; nor any set of documents from all those warehouses as of the same date. The data contained in Mr Clarke’s stock reports does not reconcile with the data derived from the stock reports from the warehouses: see Sub-Appendix 4.8.2 to Mr Pollock’s report. The Clarke stock reports record stock greater than that reported in the warehouse letters of between 48,573 and 183,166 cases (Footnote: ⁸¹). Mr Pollock’s calculated end position – taking the period from 28^th May 2003 to 8^th October 2004 and all stock movements – produced 66,853 cases less than the amount of cases recorded in the stock report of 8^th October 2004: see Sub Appendix 4.8.3.

TEL pleaded that its opening stock was 151,579 cases, originally ordered by Namelex but paid for by the Tlais family. But TEL has never, despite requests, identified the make-up of these cases by brand, nor any documentary evidence that establishes that TEL owned this amount. (If the figure is correct, it is agreed that, on the basis of the volumes of purchases, sales and destroyed stock in the historic trading account (see paragraphs 710ff below) the closing stock would be 77,192 cases). Nor is it possible to value the opening stock. It is possible that the value of the opening stock for which TEL seems never to have paid, is nil. But this is unlikely, not least because TEL appears to have realised some value from it.

Mr Clarke’s evidence (“It is very complicated and I am not the best person to explain it”) was, in effect (Footnote: ⁸²) that the 151,579 cases consisted of (a) goods in Cyprus that were owned by Mr Tlais, Highstreet, or one of the Tlais family, “whoever opened the LC”, and (b) goods in Dubai that had been owned by Mr Tlais or Highstreet or the bank or whoever purchased the goods (Footnote: ⁸³) but had been released to Adam Trading (since until around Christmas 2002 goods in a warehouse had to be consigned to a resident company), but not paid for and were goods which Mr Tlais could claim back. They had been entered on the Adam Trading customer accounts. According to a document prepared by Mr Clarke after the termination of the TEL Agreement, as explained by him in evidence, there were 80,681 cases of goods transferred to TEL from Highstreet in Cyprus, and 70,000 cases under the ownership of Adam Trading, in Dubai, which Adam Trading released to their customers during the TEL Agreement and for which TEL received payment during the TEL era.

There are no records to show the level of goods returned, although there were said to be many returns.

There is no complete set of stock records to confirm the closing volume or value of stock at the termination of the TEL Agreement or any date thereafter. It is possible that it had no realisable value.

Agathocleous appears to have been instructed, not by Mr Clarke and presumably by Mr Tlais, that TEL owned 160,000 cases as at 31^st December 2005. Mr Mathew-Jones was instructed some time before his report of March 2007 that there remained 16,000 cases in Dubai and 4,920 cases in Cyprus.

In the light of the above it is clear that TEL failed to keep accounts and records clearly showing its inventories relating to the brands, let alone full proper and accurate ones. It is not possible to tell, even now, what TEL’s opening stock was nor its value, nor is there any full and accurate TEL record of additions and releases and of outstanding balances of stock at all the warehouses at which stock was kept.

The obligation to keep full, proper and accurate accounts and records requires the keeping of records to a standard that a competently managed company in TEL’s position could reasonably be expected to achieve. Different companies may keep records in different forms and still comply with that standard.

Paragraphs 702-705 and 709 below reflect matters upon which Mr Mathew-Jones and Mr Pollock, the experts for the parties, were agreed or which are accepted by Mr Tlais.

TEL’s business involved the purchase, receipt, storage, sale and shipping of billions of cigarettes across several jurisdictions and in several different currencies. Its activities were, however, essentially simple. It bought, kept and sold cigarettes.

TEL’s transactions could have been accounted for and adequately recorded in a basic set of accounting records. It could be expected to maintain books and records in accordance with relevant laws and accounting guidance which would record the actual financial performance of the business. These would include the books and records necessary for the preparation of financial accounts including a profit and loss account and a balance sheet. Underlying those financial accounts there should be books of account, typically, but not necessarily, maintained on a double entry bookkeeping system, which recorded the individual transactions.

TEL could be expected to have kept the following documents:

Compliance with TEL’s obligation under clause 4 (viii) would, in my judgment, require the keeping, in addition to financial statements (not necessarily audited), of at least the following records or their equivalent: (a) sales and purchase ledgers; (b) sales and purchase invoices; (c) stock records; (d) a nominal ledger; (e) a cash book, properly so called ; (f) invoices for direct and indirect selling costs; (g) some record of overhead and administrative costs; (h) information as to payroll costs; and (i) banking records relevant to the business.

TEL failed even to come close to compliance with these requirements. It kept no financial statements which were even half reliable. Its stock and sales records, such as they were, were defective in the manner that I have described. The “sales” figures in the customer accounts were probably overstatements. It had no sales and purchase ledgers or nominal ledger (and Highstreet does not appear to have had any either). Nor did it have any cash book in the normal accounting sense of that term. Only a small proportion of goods sold were covered by invoices. TEL has disclosed bank statements for 20 different accounts. But there are significant gaps in the statements produced, which, despite requests, have never been filled. There were, in addition, accounts at other banks through which TEL business was conducted and the statements for these accounts have never been produced.

Full, proper, and accurate accounts and records of TEL would have given some explanation and record of how the price actually received on the sale of goods that TEL had bought from Gallaher was handled. Mr Tlais’ evidence was that all the money that Tlais was to receive for the sale of the Brands went to Highstreet, and not to TEL.

A critical test as to the adequacy of TEL’s records is whether they were sufficient to prepare a complete record of TEL’s historic trading performance. It is agreed by the experts (and Mr Tlais) that the financial information disclosed by TEL is

“incomplete and, in the absence of other information, is insufficient to prepare a complete record of TEL’s historic trading performance”.

Subject to that qualification Mr Pollock and Mr Mathew-Jones reached a substantial measure of agreement as to figures for an historic trading account reflecting TEL’s trading during the TEL era. They have however been unable to test its accuracy in the absence of any reliable financial accounts or summary of account balance.

They agreed a net trading result of US $ 12,041,480 reflecting total sales revenue of $ 42.1 million (derived from customer account statements and sales invoices (Footnote: ⁸⁴)); less:

The experts have also agreed that TEL had purchased the 365 day stock for $ 3.4 million and new stock for $ 18.8 million, as well as receiving the Dubai/Cyprus stock.

The only difference between the two accountants was that Mr Mathew-Jones would deduct $ 2,579,967 for stock destruction costs and $ 12,902,231 for a write off of irrecoverable debtors. He would write off the debtors on the basis that this is what should be done in the absence of evidence to the contrary, particularly since there is evidence that some customers are preparing their own claims. Mr Pollock takes the view that whilst some of TEL’s debts may have been irrecoverable it is impossible to determine a reliable figure for what that amount might be.

The $ 42.1 million figure is likely to be overstated. As is now apparent the figures in the customer accounts do not always represent the prices which the sub-distributors were bound to pay and were liable to be discounted according to whatever price the sub-distributor managed to obtain. That will mean that the net trading result is overstated. The net trading result would also fall to be reduced by the value, if any, of the stock remaining at the end of the period.

The experts agree:

The effect of the above is that (a) $ 8.4 million ($ 27.8 – 19.4m) of receipts on the customer accounts could not be matched to the banking documentation; and (b) about $ 15.3 million ($ 34.7 - $ 19.4m), i.e. about 40% of receipts by TEL, could not be linked to receipts recorded on the customer accounts. These are major defects in record keeping.

As to $ 15.3. million the experts agreed the following:

“4.12

The US$15.3 million unmatched third party bank receipts (i.e. approximately US$34.7 million less US$19.4 million) can be split into the following four categories:

• US$1.8 million which appear to relate to known customers (or persons / entities identified as the payer of an amount already matched) but which we are unable to match to specific entries in the customer account statements;

• US$3.1 million from named third parties but which are not a known customer (i.e. a party identified as the payer of an amount which we have been able to match another receipt from)

• US$1.4 million of receipts from OTI which are matched against sales invoices identified separately; and

• US$9.0 million of other receipts for which we have seen

no further information”

US $ 9 million is over 25% of total receipts.

The experts also made this observation:

“4.13

We do not know what these unmatched receipts relate to, however we agree that there are a number of possible explanations. These include:

• receipts from customers as listed in the customer accounts, for which we do not have sufficient information to make a match;

• receipts from sales which have not been included within the accounting records disclosed;

• receipts from old debts due from sales made in the Namelex era;

• receipts from Mr Tlais, or members of his family to provide additional working capital to finance the business;

• receipts for business carried out by Mr Tlais which is unrelated to that of TEL”.

In Mr Pollock’s view, with which I agree, it is not possible to create a historic profit and loss account that provides a reliable record of TEL’s past financial performance, even on the basis of the reconstructed historic trading account (Footnote: ⁸⁸).

Firstly, the documents disclosed are incomplete and unreliable. For example, Mr Pollock was only able to match three sales invoices to entries on the customer accounts. He found credit advices with descriptions including reference to an invoice number but has not seen the corresponding invoice. He was unable to reconcile some 27 cash receipts in the banking documentation having descriptions which suggest that they were receipts from customers, with receipts shown on the customer account statements. These amounts total $ 3,575,526 (Footnote: ⁸⁹). There are gaps in the banking documentation particularly in relation to the period May 2002 to December 2002.

Secondly, it is not possible to calculate the gross profit. Gross profit is sales revenue less cost of sales. The cost of sales is calculated as the value of the opening stock plus purchases less closing stock. By calculating gross profit in this manner the sales made in any given period are matched by the costs appropriate to those sales. Without such a calculation costs will appear in the account in one year (e.g. the very large costs of initial purchases in 2002/3 which represented 86% of total purchases over the whole period of the account) which may be far more than the costs properly attributable to sales in the same year; or one year (e.g. 2003/4 and 2005/6 in the historic trading account) may have sales with no apparent related cost.

In the present case the only figure for opening stock is the pleaded but unsupported figure of 151,579 cases of stock transferred from Namelex to TEL. There is insufficient information available to value that stock, whose make up and age are unknown. Nor is it possible to derive opening and closing balances for each year by using the purchase information (in the form of Gallaher invoices) and sales information gathered by Mr Pollock from the documents disclosed.

The brand of stock sold is apparent from the documentation but it is not possible to tell whether and to what extent the sales made were sales of (a) cigarettes transferred from Namelex, (b) new purchases from Gallaher or (c) Gallaher stock held in Dubai and Cyprus transferred to TEL at nil value. TEL mixed old stock with new, in what is said to have been the proportion 80% (new) and 20% (old). It is impossible to determine from the documents which sales were of mixed goods and of what each particular sale consisted. It is thus not possible reliably to calculate the cost of sales of mixed product or the value of stock left behind. On the assumption that the opening stock was 151,579 cases it is possible to calculate a closing stock of 77,592 cases, but neither its make up nor its value (Footnote: ⁹⁰).

Since it is impossible to derive from the documents a figure for opening and closing stock, any attempt to derive a profit and loss account would require the making of assumptions as to:

As to (iii), Mr Pollock performed a calculation which assumed that the opening stock was 151,579 cases of existing stock and that all the stock sold was mixed in an 80:20 proportion of new to old in respect of all brands as pleaded. The effect of making that assumption was that there was (see Sub-appendix 6.5.2) a shortage of new stock at the end of the period resulting in a negative new stock balance of 80,740 cases. This exercise showed that it was not possible to calculate a reliable stock movement schedule by category of stock using the 80:20 ratio. It may be that whilst in general a ratio of 80:20 did apply, there were some shipments of unmixed old stock or different permutations of old and new stock in the sales transactions. But, if so, the documentation did not enable Mr Pollock to make an appropriate adjustment.

As to (iv), normal accounting convention is to take the lowest of cost and net realisable value. That requires you to be able to identify what was sold and what remains and the original cost of the latter. This cannot be done.

Mr Pollock concluded that there were too many unsupported assumptions that needed to be made in order to prepare a stock movement schedule to enable a reliable value for stock to be determined at any time in the TEL trading period. Accordingly he did not regard it as possible to prepare a reliable historic profit and loss account for TEL. I agree with this analysis.

The matters to which I have referred in paragraphs 704-727 above establish that TEL was in breach of its duty to keep full proper and accurate records showing clearly all sales transactions and inventories in relation to the Brands. It kept no accounts; had no full and proper records of sales or stocks, nor did it keep the accounting records that it could reasonably have been expected to keep.

Paragraph 112 of the Defence reads as follows:

“Further, or alternatively, if (which is denied), any conduct on the part of TEL was strictly contrary to the terms of the TEL Agreement, or any of them, GIL is estopped and/or otherwise precluded from relying on the same by reason of:

112.1

its consent and/or instructions given to TEL in relation to the relevant conduct and/or its acquiescence in the same; and/or

112.2

the fact that any infringement of the strict terms resulted from GIL’s conduct (as pleaded at paragraph 51 above) and/or GIL’s own breaches of its obligations under the TEL Agreement as pleaded at paragraph 122 below”.

The breaches alleged in paragraph 122 were the removal of Sovereign and a failure to cooperate with TEL in the exercise of its best endeavours under clause 2 (v) (b) of the TEL Agreement or in conducting its business under the ITP.

TEL was asked for further information about its case on estoppel. Its response was that its case was clear. It then referred to certain paragraphs in its existing pleading by way of example. These examples did not relate to any breach by TEL of the ITP, or any failure by TEL to keep records, to sell brands commensurate with demand or to appropriate customers, to take proper steps for the distribution, sale and promotion of the brands, or to secure proper business conduct by its customers, or in respect of the breach of the ITP by TEL’s customers.

The evidence given in TEL’s witness statements in support of the plea of acquiescence was of the highest degree of generality. It consisted of paragraph 904 of Mr Clarke’s witness statement which read:

“Even if there were any respects in which it could be considered that TEL fell down in any way on the strict letter of the requirements of the distribution agreement, any defaults could in no sense be considered serious or irremediable (as I have described in this witness statement). TEL’s conduct at all times was agreed to or acquiesced in by Gallaher itself and/or was entirely reasonable and appropriate given the situation in which TEL was dealing and in which it was placed by Gallaher.”

In the course of being cross examined Mr Clarke and Mr Tlais from time to time stated, particularly when any question of possible breach was involved, that Mr Jack knew about what was going on at TEL and made no objection to it. Reliance was placed by Mr Tlais on the fact, which I do not doubt, that Mr Jack would come to Cyprus about once a month, receive information from TEL and make a long note of it. Mr Jack had a catch phrase “fair enough” when given information.

Mr Jack knew a lot about TEL’s business. He was a regular visitor and sought information on a number of topics including stock (he had access to the warehouses) and sales. He participated in the production of business plans. But it is not at all clear to me what he knew about the deficiencies of TEL’s accounts and records, or that he was able to conduct any sort of review of them, much less that he clearly indicated to TEL an acceptance of, or indifference to, the major deficiencies in them.

Mr Clarke gave evidence of how, in March 2004 when Mr Keevil visited Cyprus, he went through TEL’s financial position with Mr Jack. It was apparent from his description that, whilst they went through the latest bank statements, customer accounts showing the latest transaction and end balance for each customer, stock figures and sundry other things, there were a number of matters that were not gone through - such as earlier bank statements, the cash book which had a file of invoices and earlier versions of the customer accounts - and that Mr Jack was not signing off on whether TEL had complied with its obligations under the TEL Agreement in respect of books and records. I have no reason to conclude that Mr Jack was doing so on any other occasion.

Nor do I accept that Mr Jack had actual or apparent authority to waive compliance with clause 4 (viii). Mr Fawaz gave evidence of a discussion he had with Mr Tlais where he told him that “normally, decisions within Gallaher are taken by consultations and as a team and Norman Jack is not the, you know, the decision – the only decision-maker within Gallaher”. Mr Clarke accepted that “we were working with a company and decisions would be made by a group of people within that company. Mr Jack, we know, was not the ultimate decision-maker for key decisions”. If TEL was to be relieved of the obligation to keep proper accounts it was not, in my judgment, for Mr Jack to do so; nor does the evidence support a claim that TEL thought that it was.

Further, the exchange of correspondence on 2^nd September and 1^st October 2004 – see paragraphs 480-486 – made plain, in a somewhat formal manner, that the terms of the TEL Agreement remained binding. The letter of 2^nd September 2004 said as much and identified a number of specific obligations, including the obligations (a) to comply with the ITP, (b) to ensure that sales were intended for final sale to consumers within the TEL territories, (c) to supply within 7 weeks of any shipment evidence of the shipment of the order to the appropriate territory, (d) to keep paper records showing clearly all sales made and (e) to ensure that anybody to whom TEL sold complied with the ITP. Mr Tlais’ response of 1^st October 2004 accepted that, until the new arrangements were agreed and formalised the TEL Agreement was binding on both parties and confirmed Mr Tlais’ full awareness of the obligations identified. This exchange of correspondence does not support the notion that TEL thought that there had been any relaxation of its obligations under the TEL Agreement and, if there had been, brought any such relaxation to an end.

TEL also failed to produce on request records showing sales transactions and inventories. Gallaher made a number of requests for stocks and sales reports. In particular in letters of 15^th October, 18^th and 29^th December 2002, and 3^rd January and 22^nd September 2003 Gallaher requested and TEL agreed to provide monthly sales and stock reports. At the meeting with HMCE in July 2002 it was agreed that HMCE would be supplied with Mr Tlais’ sales data on a monthly basis, such data to be incorporated in the export sales data supplied by Gallaher monthly. The data would be broken down to show quantity and final destination market.

Six stock reports were produced by TEL at irregular intervals, the last in October 2004: see paragraphs 527 and 691 above; but written sales reports were not. The stock reports did not identify which goods were TEL coded and which were not (let alone what the destination code of the goods was); or for the most part where the stock was. As is apparent from paragraphs 693-694 above the figures in the stock reports do not reconcile to the warehouse stock summaries or to the figures for goods shipped by Gallaher and the releases recorded on the customer accounts. Sales reports were not produced.

Mr Jack himself obtained information from time to time about TEL’s inventory position. The documents reveal that in November 2002 he performed his own analysis of the Old Stocks. In January 2003 he was able, with the assistance of Mr Clarke and Joseph Khatter, who provided details of the closing stocks, to carry out a reconciliation of stocks and sales for 2002. In October 2003 he carried out a full stock count in Dubai, distinguishing between goods purchased under the TEL Agreement, Old Stocks and Dorchester awaiting destruction. He verified that his count of Dubai stock matched the records he had been provided with. In May 2004 he provided information on TEL’s stock levels to the HMCE. In October 2004 he faxed a stock report from Cyprus.

On 14^th January 2005, Mr Keevil wrote to Mr Tlais acknowledging the failure of negotiations in 2004 and inviting Mr Tlais’ “considered proposals concerning a potential discontinuance of our business relationship”. Mr Keevil reminded Mr Tlais that :

“Under our contract you are, of course, required, amongst other matters, to notify us of the final destination markets and provide the documents necessary to demonstrate that the goods have gone to the final destination markets. HM Customs will undoubtedly ask Jeff for this information in the near future. Could you please arrange for Mike to provide him with this information? At the same time can you let Jeff have a full stock reconciliation and your proposals for liquidation of your stocks, as he will need this information for HM Customs? If you could provide this information next week it would be very helpful.”

On 26^th January 2005, as I have already recorded, Mr Jeffery wrote to Mr Tlais seeking

“at this time, a summary report, showing:

a)

Stocks by brand and location at the time of last reconciliation

b)

Sales by brand since the reconciliation identifying your customer and market destination

c)

Current stocks by brand and location

d)

Status of the stock i.e. whether or not they have been pledged to Blom bank.”

On 3^rd February 2005 Mr Tlais replied. He referred back to Mr Clarke’s 8^th October 2004 stock report and said:

“Since that point 5000 cases of Sovereign have been released, 1600 fresh Dorchester full flavour and the full balance of Businessman. All other stocks remain the same. The location of the goods also remains the same.”

This was an inadequate response. The customer accounts in respect of the period from October 2004 to February 2005 show releases of Sovereign well in excess of 5000. More than 17,000 cases are recorded as having been released to Adam Trading. The accounts do not show any releases of Dorchester. The 8^th October 2004 letter did not provide any detailed location of the stocks. It stated that the goods were “held in several locations including the Republic of Cyprus, the occupied territories, Dubai, North Africa, Latin America and Iraq”.

In short TEL did not provide full, proper and accurate records of sales transactions and inventories.

TEL’s breaches of its obligations of clause 4 (viii) were material. They have deprived TEL, Gallaher, and the Court of the ability to have a reliable view of the success or otherwise of TEL’s trading activities or a proper foundation upon which to assess TEL’s claim to damages. The absence of such accounts and records has led to enormous efforts having to be made to construct from inadequate raw data the means of establishing or refuting a huge claim for loss of profits. That is, is itself, an indication of the materiality of TEL’s breach. One of the reasons for having proper accounts and records is to avoid the sort of protracted and expensive reconstruction exercise that has had to be undertaken in this case (Footnote: ⁹¹). Another reason is to enable Gallaher to monitor what has happened to and in respect of its goods, to whom they have been sold and with what intended destination; and to facilitate the investigation of Customs’ seizures of goods, for which purpose TEL’s accounts and records were inadequate.

TEL submits that, to the extent that there were any breaches, they were remediable. Had a notice to remedy, rather than a notice of termination, been given, TEL and its accountants could and would have obtained the necessary information from distributors, customers, banks, and warehouses.

I regard this submission as wholly unrealistic. By March 2005 TEL’s breaches were not remediable within 30 days. Its failure to keep proper accounts or records was extensive, deep seated and of long standing. It was not able, even at a trial in which it claims very large sums, properly to establish its sales, stock and accounting position. No doubt it would have been a better position to obtain data from third parties if Gallaher had not terminated the TEL Agreement; but it is most unlikely to have been able to have remedied the sizeable gaps in accounts and records within 30 days or even a more extended period.

Accordingly, Gallaher was, in my judgment entitles to terminate the TEL Agreement on the ground of TEL’s breach of clause 4 (viii).

Clause 3 (v) of the TEL Agreement provided that, in the event of TEL having to make deliveries to destination markets via an intermediate port:

“promptly after the arrival of each shipment of the Brands in the Territory, and in any event within (7) weeks of the arrival of any shipment of Brands to a territory, [TEL] shall supply to GI or Gallaher evidence of the shipment of each such order to the appropriate Territory.”

The reference to “arrival” in the Territory, and the obligation to supply evidence of shipment to the Territory within at most seven weeks of that arrival, shows that the clause required TEL to produce evidence of the shipment arriving in the Territory, not simply its shipment from the place of dispatch.

There are a number of ways in which TEL could evidence the shipment of cigarettes to their ultimate destinations. These would or might (depending on their content) include one or more of: (a) orders from, invoices to, and records of payment from TEL’s customers; (b) records of releases from warehouses; (c) bills of lading or freight forwarding instructions; (d) exit/export certificates stamped by Customs and customs bills for administrative charges; (e) documents showing that the shipper had discharged containers at the intended destination; or (f) in the case of sales ex warehouse details of the consignee and the intended destination.

In October 2002 Mr Perks began an audit of the shipping documentation provided by TEL. This was an ongoing process in the course of which TEL was asked for further documentation. The progress and upshot of that audit and his findings relating to the first year of the TEL Agreement are set out in paragraphs 363-364 and 374 – 379.

As appears from those paragraphs the documentation provided by TEL in relation to the first year was defective and incomplete. In particular TEL failed to provide documents relating to shipments to Parsian Fougan and to TSS Tutun Sigara Savayi. These documents appear never to have been handed over to Adam Trading or to TEL. Between these two the missing documentation covered about 556 million cigarettes. Some of the cigarettes supplied may have been Old Stocks.

Parsian Fougan refused to co-operate in the provision of documents because of the problems with the damaged Dorchester. Hazem was seen by TEL in Iran shaking a set of documents, which he said he was going to give to Mr Jack - but not before his problems were solved. TSS was, I assume, unwilling to cooperate because it had been red carded.

Clause 3 (v) does not provide for exceptions, nor for TEL to be released from its obligation because of any reluctance on the part of a sub-distributor to provide the necessary evidence. It was, therefore, incumbent on it to make such arrangement with its sub-distributors as would ensure that it could produce the documents needed.

In relation to documents in respect of Iran Mr Clarke suggested that TEL had, under the Procedural Agreement, only limited obligations for ex warehouse sales. According to his evidence Parsian Fougan purchased from Adam Trading ex warehouse as did Adam Trading from TEL. But goods for Iran fall into the second category under that agreement, in respect of which TEL was to be “responsible for onward shipments of goods to final destination” and subsequently was “to provide Gallaher with evidence of shipments by way of Bills of Lading, Customs release documents etc”. The fact, if it be such, that TEL did not in practice control shipments to Iran cannot absolve it from compliance with clause 3 (v). Moreover it was open to Adam Trading to ensure that any ex warehouse buyer provided copies of the shipping documents for supply to TEL/Gallaher.

In any event, not all sales to Hazem were made ex-warehouse. The disclosed documents reveal that there were some direct shipments from TEL to Hazem in the summer of 2002 including 48,000 cases of Dorchester full flavour and 12,000 cases of Dorchester Lights.

TEL also placed reliance, in relation to Iran, on the facts (i) that Gallaher representatives had had discussions with Firouz Homayoun as a prospective distributor in place of Hazem, about which Hazem had learnt; (ii) that Ligett-Ducat had sold some LD to a company called Platinum Leaf for Iran; and (iii) that Gallaher had delayed in the production of a marketing plan. None of these were breaches of contract by Gallaher. Gallaher was entitled to have discussions, which were only tentative and came to nothing, with Homayoun. The sale to Ligett-Ducat was soon discontinued. The delays in production of a marketing plan, which in November 2002 Mr Rolfe had said his team would look into preparing, was no justification for the non production of documents.

In relation to non Iranian markets, reliance was placed by TEL on the difficulties faced by TEL because the goods being sold where old or damaged. That is not, however, a justification for non production of evidence as to where they have gone.

TEL says that it only had an obligation to procure documents in respect of 80% of shipments: see the letters of 20^th May and 2^nd October 2003. For the reasons given in paragraphs 332 above I do not accept that TEL and HMCE agreed on Mr Tlais exercising only 80% control over Sovereign. I also do not accept that it was agreed that Mr Tlais need only produce documentation for 80% of shipments in the first year of business, an agreement that Mr Tlais characterised in his letter of 20^th May 2003 as an agreement with HMCE.

What Mr Rolfe did tell Mr Tlais, in a letter of 23^rd June 2003, was that “based on our previous discussions I have committed to my fellow directors that we will be able to account for 80% of all documents as a minimum”. This was a reference to the fact that Mr Jack had told him that he believed that he had documents showing end destination, covering around 80% of shipments. Mr Jack had previously produced a memorandum showing that, on receipt of a further parcel of documentation held in Iran and with Adam Trading in Dubai, this figure would rise to around 95%. On the strength of this Mr Rolfe had felt able to commit to his directors that 80% could already be accounted for. On 27^th June he confirmed in an e-mail that he was holding up approval for the manufacture of a new order for Sovereign pending clearance from GRA that the documentation in respect of earlier shipments was at a satisfactory level which he put at least 80% of volume. The sequence of events thereafter appears at paragraphs 378ff.

The documents that were produced were incomplete, and some of them unsatisfactory. The inadequacies of the documentation were set out in Mr Jack’s letter of 21^st July 2003.

I do not regard these breaches as material. Materiality has to be assessed in the context in which the question arises which, here, is the possible termination of a five year agreement. In order for a breach to be material it does not have to be repudiatory: Dalkia Utilities Services Plc v Celtech International Ltd [2006] EWHC 63 (Comm). In Phoenix Media Limited v Cobweb Information, Unreported, 16th May 2000, Neuberger, J, as he then was, said:

“Materiality involves considering the following: the actual breaches, the consequence of the breaches to [the innocent party]; [the guilty party’s] explanation for the breaches; the breaches in the context of the agreement; the consequences of holding the agreement determined and the consequences of holding the agreement continues”.

I respectfully regard that as a helpful check list.

The essential character of the breach was a failure to prove evidence of arrival in the relevant Territory of over 500 million cigarettes. It arose in circumstances where the likelihood was that the goods had in fact arrived in Iran and Syria. Proof of arrival was withheld because one recipient was in dispute with TEL or Adam Trading and the other had been red carded. Documentation had been produced in respect of over 80% of shipments and Gallaher had been prepared to continue to manufacture on that basis. In December 2003 Hazem showed Mr Jack documents which, as far as he could tell (they were in Farsi), proved arrival of the goods in Iran. The TEL Agreement was a long term agreement covering many hundreds of millions of cigarettes. Termination would have been acutely prejudicial to TEL. The effect of the breach, if the TEL Agreement continued would have very limited prejudicial consequences for Gallaher.

In any event Gallaher waived this breach as a ground for termination. It plainly decided not to terminate the TEL Agreement on the ground that insufficient documentation had been provided in respect of the first year but to continue with it, and communicated that decision both by Mr Jack indicating on 21^st July 2003 that the documents were broadly in order and by Gallaher’s conduct in not terminating despite the deficiencies in the documents. In March 2005 it was too late for Gallaher to terminate on this ground.

In October 2003 Mr Jack reviewed the TEL documentation for the year to date. He reported that he found documentation in respect of 97.4% of sales to be complete.

In September 2005 i.e. after the termination of the TEL Agreement Mr Perks carried out a review of the 2003-4 documentation from Mr Jack’s office. He did so again for the purposes of his witness statement. Mr Perks would regard as an acceptable set of documents: (i) a customer invoice, (ii) an exit certificate bearing customs stamps, (iii) a stamped customs bill showing the payment of administration charges, (iv) a bill of lading and (v) freight forwarding instructions. In respect of no shipments was there a customer invoice. In respect of some there were various combinations of the other four documents: see Appendix 2 to Mr Perks’ statement. The fact that, in relation to these shipments, there was not what Mr Perks would regard as a complete set of documents does not necessarily mean that the one or more documents that were produced were insufficient to show delivery to the ultimate destination. His five category list is something of a counsel of perfection. I proceed on the assumption that in cases in which there was a combination of documents there was sufficient material to vouch arrival.

The remainder of the documentation appeared to be single items relating to individual shipments. These documents had the following deficiencies:

Mr Perks did not produce a figure for the percentage of shipments not covered by adequate documentation because he had not seen what he regarded as accurate sales records from TEL for this period.

In at least two instances the documentation produced by TEL was false. In the first example Iran was specified in the Customs exit certificates as the destination for 1,950 and 960 cases of Sovereign going from Dubai (Jebel Ali). The goods, some of which were coded for Yemen and some for Iran, were in fact shipped by Adam Trading to Rotterdam, with Loendersloot as the notify party, (although there are also copy bills of lading naming Metco Ltd as the shipper). This is apparent from a comparison of the container and seal numbers on the exit certificates which also appear on shipping documentation obtained by Gallaher from Metco pursuant to a letter of request in Holland. The goods had been sold to Metco C & F Rotterdam. Metco paid Highstreet for the account of Adam Trading.

In the second example the Yemen was specified in the customs bill as the destination for 4,000 cases of Sovereign cigarettes; whereas, again, the goods, coded for Iran, were shipped by Adam Trading and Metco to Holland with Loendersloot as the notify party and sold to Metco by Adam Trading C & F Rotterdam. It is unlikely in the extreme that these two sets of goods were sent to Rotterdam in transit to Iran or the Yemen.

Mr Tlais was aware that funds were being paid to Highstreet to be credited to Adam Trading because Dr Al-Mahamid would tell him that funds were coming in. His evidence was that this did not mean that he knew that the money came from Metco. He denied any knowledge of the false exit certificates.

Mr Tlais is not shown to have been aware of what Adam Trading was doing in relation to the documentation. But it is unlikely that he was unaware of what Adam Trading was doing with the goods, at least in general terms: see paragraph 618 above.

Even if, contrary to my view, Mr Tlais was not aware of the destinations to which Adam Trading was sending the goods (including Yemen and Rotterdam), TEL was in breach of its obligation to produce evidence of the shipment of the orders to the appropriate Territory. It could not rely, in respect of Iran on the provisions in the Procedural Agreement relating to the third category – deliveries to Cyprus/Dubai - because that category applied to “all other contractual markets except those dealt with above” and Iran is dealt with in the second category. In respect of the Yemen, which did fall within the third category he was still obliged to provide details of “the goods, quantities, full consignee details and the intended destinations”. In fact TEL produced documentation which purported to evidence shipment to Yemen and Iran when that evidence was false. TEL was also in breach of its obligation to procure compliance by its sub-distributors with the ITP. TEL did not comply with its obligations under the TEL Agreement simply by selling to Adam Trading and leaving Adam Trading to it. Insofar as it relied on Adam Trading to comply with its obligations and to produce verifying documentation it did so at its risk.

On Mr Tlais’ evidence he took no effective steps to audit Adam Trading or to monitor its records to see where goods were going. As he put it:

“I cannot be the accounting, I cannot be the salesman, I cannot be everyone in the office. He has a duty. I was getting a telephone call. He was informing me about money…the money has been received, this is what I used to know. Now, the details of who sent it, who does this and that, I have no idea”.