In these proceedings the claimant (Gul) seeks damages in respect of the profits which it contends it would have made under a licence agreement (the Agreement) granted to it by the defendant (Nichols) for the production and distribution of Vimto double strength (DS) cordial and ready-to-drink carbonated Vimto drinks across Pakistan. It was Gul’s contention that, after months of negotiations and the expenditure of significant time and money, shortly before Gul was about to launch these products into the market in Pakistan, Nichols withdrew Gul’s licence to produce the DS Cordial because of pressure applied to it by its largest distributor, Aujan Industries Co (Aujan).

Aujan was not only considerably larger than Nichols but had a long standing relationship with it over a period of some 90 years. The owner of Aujan and the chairman of Nichols (Mr John Nichols) had known each other over a considerable period of time and the distributorship agreement with Aujan was negotiated by the two personally. Aujan had reason to oppose the production of DS Cordial in Pakistan since it feared that it would impact on its own sales in that territory, although it had no franchise for it under the terms of its own distributorship agreement. From the documents and evidence before me, it is clear that Aujan exported to Pakistan and in consequence there existed what is known as a “grey market” for Vimto products in that country. Because its products were produced and bottled abroad, there were inevitably additional shipment costs and the DS Cordial was accordingly sold as a premium product in the more expensive “top end” stores in Karachi at prices ranging between 325 rupees and 345 rupees a bottle. Aujan may also have feared that Vimto DS Cordial produced in Pakistan by Gul might “leach” into its own franchise territories.

Nichols contested Gul’s claim on three separate grounds:

Nichols contended that the Agreement had never been for DS Cordial at all but only covered single strength cordial (SS) and carbonated products.

Nichols contended that Gul failed to mitigate its losses by rejecting an offer made by Nichols in January 2013 (six months after Gul’s letter before action). The offer made was to conclude a new Licence Agreement on the terms which Gul had always contended were the terms of the original Agreement.

Nichols contested the quantum of Gul’s loss as put forward by Gul and Mr Sequeira of Navigant Consulting, the expert engaged by Gul. He produced a discounted cash flow analysis, using the “Navigant model” which projected the revenues that Gul would have generated from the sale of Vimto products but for Nichols’ alleged breach, projected the costs that Gul would have incurred to realise those sales, projected the cash flows that Gul would have thus generated and, after calculating the applicable discount rate, applied it to establish the present value of the future cash flows. Whilst this methodology was not an issue between Mr Sequeira and Mr Wilkinson, the expert engaged by Nichols, Mr Wilkinson made trenchant criticisms of the model and the use made of it by Mr Sequeira but did not give an opinion himself as to the likely level of loss of profits.

I need not descend into the details of the issues on liability, save to say that there were arguments about construction based on the wording of the contract and Gul made a claim for rectification of the contract wording and a claim based on estoppel by convention. On the morning of the fifth day of the trial, after I had heard evidence from the two main witnesses involved in the negotiations and dealings between the parties, namely Mr Shaheryar Leghari and Mr Segar, Nichols conceded liability with a statement of its revised position in the following terms:

The concession was wisely made in the light of the evidence which I had heard. Nichols’ case on liability was unsustainable as it was clear from the documents and from the evidence that, notwithstanding the wording of the Agreement dated 28th September 2011 and the signed letter of amendment dated 2nd November 2011 which set out permission “to distribute Vimto cordial in 710 ml PET bottles throughout Pakistan and not only within the Territory as defined in the Agreement”, it should have referred to Vimto Cordial in 710 ml glass bottles. It was also clear that the Vimto Cordial which was the subject of agreement was DS Cordial, as was made plain by an exchange between the parties on 6th June 2011. Nichols’ case, prior to this concession was an opportunistic case based on a mistake made by its lawyer in drafting the amendment letter, unnoticed by anyone at the time. It did it no credit at all and its subsequent contention that the Agreement did not cover DS Cordial but only SS cordial because of the reference in the amendment letter to PET bottles was one which should never have been made. Not only did those who were involved with Gul on Nichols’ part know that there had been agreement for Gul to distribute Vimto DS Cordial in glass bottles, but any reading of the documents, including Nichols’ own internal documents, revealed the position without leaving room for any doubt on the subject.

Between 20th and 22nd February 2012 in Dubai, as a result of pressure from Aujan, Mr Leghari was told by Mr Segar (Nichols’ sales manager for its Middle East and Asia regions), in the presence of Mr McDonnell (the managing director of Nichols’ international division), that Aujan had an issue with Gul producing DS Cordial and therefore Gul would not be able to do so. Mr Leghari’s evidence was that he was stunned and confused but did his best to reason with the two of them, stating that Gul would be in a very difficult position if it could not produce DS Cordial, since it had already invested a significant amount of money in preparing to launch it (including ordering bottles) together with the carbonate product in the imminent future. The matter was left on the basis that some alternative solution might be found with Mr McDonnell and Mr Segar saying that, after they returned to England from this meeting in Dubai, they would seek clarity from the Nichols’ board and revert to Gul.

It is apparent from the email exchanges between Nichols and Aujan between February 20th and 9th March 2012 that, notwithstanding Nichols’ evidence to the contrary at trial, it had made it plain to Mr Leghari in Dubai that Gul should only produce and distribute SS cordial, not DS Cordial and that, contrary to its practice and that of its distributors under which SS cordial was sold in PET bottles, it was suggesting to Gul that the glass bottles which, at Nichols’ insistence, Gul had ordered for distributing DS Cordial be used for SS cordial instead. The emails show the pressure being put on Nichols by Aujan to prevent the manufacture of DS Cordial by Gul in Pakistan for distribution there with presumably objection to the prices that Nichols proposed to charge Gul, as compared with that paid by Aujan.

Following the meeting, the first communication from Nichols to Gul was by way of email on February 28th, some six days after the meeting. On that date Nichols sent Mr Leghari, for the first time, the recipe for the SS cordial, followed four hours later with a request for an “update” as to the launch of Vimto carbonated drinks in PET bottles, a volume forecast for the rest of 2012 for SS cordial and details of the labelling on the bottle which would have to reflect the Nichols UK label for SS cordial rather than DS Cordial. Furthermore, for the first time, it was suggested that Nichols had set the prices for the concentrate which it was to supply to Gul for drinks production by reference to carbonated Vimto and not cordial prices. Nichols stated that at some point that year it would “need to increase your concentrate purchase price against your cordial concentrate requirements in order that we will meet our worldwide pricing strategy”.

By 28th February 2012 therefore, Nichols had renounced the Agreement, as amended by the amendment letter, inasmuch as it had refused to allow Gul to produce Vimto DS Cordial in 710 ml glass bottles, was insisting that it should only sell Vimto SS cordial and was further suggesting a price increase in the concentrate above that set out in Schedule 3 to the Agreement.

Aujan however continued to apply pressure, not even wishing SS cordial to be produced in glass bottles, which led to a degree of rethinking on the part of Nichols as revealed by an email of 7th March following a meeting between top management. Nichols wished to preserve DS Cordial as a premium product in glass bottles and SS cordial as a cheaper product in PET bottles “but under strict operating guidelines ref price and supply/production volumes etc”.

Mr Leghari sent an email on 12th March to Nichols stating what had previously been agreed, namely that Gul could produce Vimto DS Cordial in 710 ml glass bottles for distribution throughout Pakistan with a launch date around the end of February for all Vimto products. Some production of carbonated beverage had already taken place which had been given away as free samples in the market by way of introduction of that product. Mr Leghari specifically sought “clarity on our meeting in Dubai as things were left not clear”.

Following further internal discussion between Mr Segar and Mr McDonnell, Mr Segar spoke to Mr Leghari by telephone on 14th March stating that the price for concentrate for DS Cordial would be C&F Karachi £26 per litre but Nichols would make a “marketing contribution” of £19 per litre equivalent to the difference between the price in Schedule 3 to the Agreement (£7) and the £26 per litre considered to be an appropriate price. By an email of the same day, Mr Segar stated that “the Vimto concentrate price for the price of Vimto cordial double strength would need to be C&F Karachi £26 per litre. Therefore as discussed could you please work out what this will translate to in terms of the end market pricing and advise accordingly.” It is clear that Nichols was only prepared to refer to a price of £26 in writing whilst offering an “unofficial” marketing contribution. This was no doubt done with a view to being able to represent to others, particularly Aujan, that the price being charged to Gul was comparable to the price being charged elsewhere by Nichols. The problem with this offer was, as Mr Leghari subsequently pointed out, that duty would be payable by Gul on the £26 “official” price. In an email of 15th March, Mr Leghari set out the history of the matter concluding, by reference to the “official” price of £26, to which Mr Segar’s email had referred, in the following way:

Nichols’ internal emails then reveal that its conclusion was that they could not continue to deal with Gul because “the pricing of the concentrate for cordial is a real issue for us on multiple levels.” Mr McDonnell told Mr Segar to review the contract to see what grounds could be found for the stance which Nichols was adopting, stating that they were “entering the area of loss of faith on both sides” although he assumed that at the new price of £26, Gul would still make a very healthy margin, rather than the “obscene” margin available at the original contracted price. It was following this review that on 28th March there was a further clear renunciation of the Agreement by Nichols. In an email of that date Mr McDonnell informed Mr Leghari that the agreed price of £7 per litre was for Vimto concentrate for use to manufacture the carbonated products referred to in schedule 2 of the Agreement and Vimto SS cordial in 800 ml PET bottles. He stated that if Gul wished to produce and package Vimto in glass bottles, the purchase price would be £26 and that, “in order to comply with our international policy” Vimto in glass bottles had to be DS Cordial. The email went on to say that the Agreement did not permit Gul to manufacture Vimto in glass bottles and it would be a condition of Nichols’ agreement to allow it to do so that the price of concentrate would be £26 per litre. Nichols was happy to honour the terms of the Agreement by supplying Gul with concentrate for SS concentrate used in PET bottles at the price of £7 per litre.

Gul did not proceed with the Vimto launch in the light of the stance taken by Nichols which prevented it from producing DS Cordial and sought legal advice on its position, whilst seeking to keep its distributors “warm” by supplying further free samples of Vimto.

By letter of 23rd July 2012, lawyers acting for Gul expressly accepted Nichols’ repudiatory breach in a letter before action which set out Gul’s claim.

The Trade Mark Licence and Support Agreement dated 28th September 2011 (the Agreement) included the following terms:

By a letter of 16th January 2013, under the rubric “subject to contract”, Nichols’ solicitors, in continuation of pre-action correspondence, made an offer to Gul. As this letter is the basis of Nichols’ contention that Gul failed to mitigate its loss by refusing the offer, it is necessary to set out the letter in full. It reads as follows:

It can be seen that, because the letter was phrased “subject to contract”, it was not in itself an offer which could be accepted to create a binding contract. On its face it appears to be intended to pave the way for such a contract, should Gul accept the offer in principle. In the letter, Nichols maintained the correctness of the stance which it had previously taken, making it clear that it would “vigorously defend its position” and pursue a counterclaim for breach of the Agreement by Gul if Gul chose to issue proceedings. The letter purported to make “an open offer” as a “commercial resolution” to the dispute, despite stating that Gul’s claim was “lacking in merit”.

As accepted by Mr Leghari in cross-examination, this offer, if translated into an agreement, effectively would have given Gul everything to which it said it was entitled under the Agreement and amendment letter, with either a start date as per the Agreement or a new date following conclusion of the dispute. The letter contended that agreement on those terms would “fully mitigate all losses” that Gul might suffer from the alleged breaches of the Agreement by Nichols.

It is plain from the fourth paragraph from the end of the letter that it was written specifically with a view to seeking to protect Nichols’ position in the event of litigation. In my judgment it is also plain that the letter could only have been written in circumstances where Nichols was fully aware of the fact that it was in the wrong in the stance that it had taken against Gul as to what had been previously agreed. The letter was therefore maintaining a dishonest stance in the sense that Nichols knew full well that its defence to Gul’s claim was untenable and wholly unjustified. Nichols knew what had been agreed and was putting forward a contrived defence on the basis of mistakes in the Agreement and letter of amendment. It could not have caused this letter to have been written by its solicitors unless it fully appreciated that there was no merit whatsoever in the contentions that were being advanced by it or on its behalf.

By a letter of 24th January 2014, Gul’s solicitors rejected the offer in the following terms:

I was referred to a number of authorities in relation to the principles of law relating to mitigation and avoidable loss, including in particular Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, Wilding v British Telecommunications Plc [2002] IRLR 524, Payzu v Saunders [1919] 2 KB 581 (CA) and The Solholt [1983] 1 Lloyd's Rep 605. For Nichols’ argument to succeed, Gul must be shown to have acted unreasonably in refusing the offer and it is in this connection that Nichols relies on dicta in Payzu v Saunders (ibid.) where both Bankes LJ and Scrutton LJ made it clear that the question as to what it was reasonable for a person to do in mitigation of damage is not a question of law but one of fact in the circumstances of each particular case. The former said that there may be cases where, as a matter of fact, it would be unreasonable to expect a plaintiff to consider any offer made in view of the treatment he has received from the defendant. By way of example both he and Scrutton LJ referred to contracts for personal services and the latter referred to the position that, in commercial contracts, it was generally reasonable to accept a seller’s offer from a party in default. The judge at first instance, with whose decision the Court of Appeal was not prepared to interfere, found as a matter of fact that an offer to supply goods on payment of cash with deliveries due over nine months, instead of the original contract provision for payment for each instalment within one month of delivery less 2 ½% discount was one which should have been accepted by the plaintiff who would thus have avoided the loss incurred as a result of the differential between the contract and market price over the period of the contract.

Having heard the evidence of Mr Leghari, whom I found to be an honest and reliable witness and having heard evidence from Nichols’ witnesses in support of a dishonest case, I do not consider that it was unreasonable of Gul to refuse the offer made in the letter of 16th January 2013. The treatment meted out to Gul by Nichols was disgraceful. The letter was written some ten months after the renunciatory breach, some six months after Gul’s letter before action and in the course of inter-solicitor correspondence about the merits of the parties’ respective positions. By this time, unsurprisingly, as Mr Leghari’s evidence made plain, he had completely lost faith in Nichols’ ability to deal fairly with Gul. He could not contemplate working with Nichols for a five or ten year period under an agreement which required ongoing trust and co-operation between the parties in relation to the distribution of Nichols’ products in Pakistan.

Nichols had shown itself susceptible to pressure from Aujan which had not wanted any interference with its grey market sales into Pakistan of DS Cordial and perhaps also feared grey market leakage the other way from Pakistan into its territories. Its main objection however appears to have been the price charged by Nichols to Gul, as compared with the prices it was being charged by Nichols, since Nichols appeared to think that disguising the true price with a “marketing rebate” might keep everyone happy. In circumstances where Nichols had ridden roughshod over the existing Agreement and advanced arguments which those responsible for dealing with Gul knew to be wrong in order to justify the stance taken, it is unsurprising that Mr Leghari felt that he could no longer trust Nichols to act properly in the context of a long term agreement. Co-operation from Nichols was required in relation to the supply of concentrate under clause 9 where Nichols had the ability to delay delivery and in relation to know how marketing and advertising in the territory. Mr Leghari was justified in suspecting continuing pressure from Aujan and reluctance on Nichols’ part to do anything to upset Aujan. Nichols’ approach to their contractual obligations thus far meant that Mr Leghari was justified in thinking they could not be trusted to adhere to any new obligations they might undertake for the future.

The fear was reinforced by the fact that the letter continued to maintain that Nichols’ position was justified. There was no admission of wrongdoing nor hint of any remorse for the manner in which Gul had been treated. If the individuals at Nichols had sat down with Mr Leghari and initially, in without prejudice meetings, had admitted that they were entirely in the wrong and made the offer of a fresh start, it might well be that Mr Leghari would have considered that he could trust them for the future. As it was, however, he had good reason to think that any future relationship with Nichols would be troublesome, that Nichols would not properly support Gul’s efforts to make a success of selling Vimto products in Pakistan and would likely look for ways out of the contract in the future, in order to avoid the very issues which had arisen between it and Aujan.

As is plain from the letter of 24th January and the response, Gul did not consider that Nichols’ offer was a “bona fide proposal” and in the context of all that had happened, it was justified in regarding it as no more than “a legal stratagem” made in the belief that it would not be accepted and with a view to adding a defence to an otherwise indefensible position. If Gul was justified in thinking this, and I find it was so justified, then it had good reason to refuse the offer and there can be no failure to mitigate, as a matter of fact, and Nichols cannot succeed in saying that any lost profits resulted from Gul’s unreasonable decision as opposed to Nichols’ own original breaches.

Clause 3 of the Agreement provided that it should last for a term of five years with an option in Gul to extend it on the same terms for a further five year period if Gul “shall have performed and observed all of the terms and conditions herein contained and on its part to be performed and observed up to the expiration of the term hereof”.

In paragraph 47 of its defence, Nichols pleaded three breaches of the Agreement prior to 23rd July 2012 which, it maintained, would disentitle Gul from exercising the option to extend for a further five years.

In breach of clause 4.5, it is said that Gul had not submitted any specimens of the containers, packaging, labels or finishing for carbonated Vimto to Nichols.

In breach of clause 8.3 it is said that Gul had failed diligently to carry on the business of manufacture and distribution of carbonated Vimto and that it had never been produced by Gul in quantities sufficient to market the product to the general public.

In breach of clauses 8.3.2 and 9.4 it is said that Gul had failed to provide any information to Nichols regarding sales, the stocks of concentrate or consumption figures.

Further, in its opening submissions at the trial, Nichols sought to rely on the principle in Lavarack v Woods of Colchester [1967] 1 QB 278, [1966] 3 All ER 683, CA to argue that the breaches by Gul had the effect of giving Nichols an option whether or not to allow renewal of the contract by Gul. The principle, as enunciated in the textbooks on damages is that where the defendant in breach has the option of performing a contract in alternative ways, damages for breach by him must be assessed on the assumption that he will perform in the way most beneficial to himself and not in that most beneficial to the claimant. Here, the option was vested in Gul which, it is accepted, would have sought to extend the contract for the further five year term in the profitable circumstances envisaged by it but it was contended that if Gul had broken the contract Nichols was entitled to refuse to allow Gul to exercise the option and the principle in Lavarack applied.

In my judgment this is not a Lavarack type of case, nor one which falls into any of the four categories of case referred to by Patten LJ in Durham Tees Valley Airport Ltd v bmibaby Ltd [2011] 1 AER (Comm) 731.

The reality of the matter however is that, regardless of any breach by Gul, it is in my judgment clear that Nichols would not have raised any point against the exercise by Gul of its option to extend if all had been going well under the Agreement and both parties were making profits from the fulfilment by Gul of its minimum purchase obligations under clause 9.3. In Lavarack, Diplock LJ qualified the principle by stating that one “must not assume that [the defendant] will cut off his nose to spite his face and to control events so as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects”.

More recently, Patten LJ in Durham Tees Valley Airport Ltd (ibid.) emphasised the need to bear in mind commercial realities in the context of an enquiry as to how a contract would have been performed had it not been repudiated. In assessing how it would have been performed:

This very much reflects the modern approach of ascertaining on the balance of probabilities, what would have occurred between the claimant and the defendant but for the breach. Here, it is to my mind self-evident that the contract would have been extended for the further five years if it was proving profitable to both parties in the absence of some major breach which made future co-operation difficult. This point is borne out by the evidence which I heard about the manner in which Nichols dealt with previous licensees in Pakistan, namely Mehran, Sunrise and Continental. Mr Segar accepted in cross-examination that for Nichols not to have renewed would be inconsistent with Nichols’ practice in dealing with its licensees. In the case of Mehran, no purchases were made at all from 2001 onwards but Nichols did not terminate the licence until 2005. Likewise, as Mr Grainger testified, Nichols were supportive of their licensees Sunrise and Continental which, not only failed to meet the original sales targets but, when targets were substantially reduced, still failed to meet them and/or were guilty of “chronic under performance”. Nichols own internal reports showed dissatisfaction with the performance of both Continental and Sunrise but no termination because of the desire to encourage them to improve rather than terminate where entitled to do so.

If Gul achieved reasonable sales of Vimto products, Nichols would profit from Gul’s success and would have a commercial interest in perpetuating the relationship.

As to the first allegation of breach: there was no failure by Gul to submit specimens of the containers, packaging, labels or finishing for carbonated Vimto to Nichols for approval. At a meeting in Dubai on October 4th 2011 Mr Leghari handed to Mr Segar a sample bottle of the finished carbonated product with packaging and labels which he was distributing as free samples to Gul’s distributors in preparation for a later launch of the product. At no stage did Nichols raise any objection to this specimen.

As to the second breach alleged, I find that Nichols agreed to a delayed launch of the carbonated product in accordance with Mr Leghari’s suggestion that it be tied in with the launch of DS Cordial in February 2012. Whilst Mr Segar had no recollection that Mr Leghari told him in conversation on October 4th that he wanted to wait to launch the carbonated product with the cordial product in order to make the most effective marketing opening and said he was unaware that the winter months of November through to February were cooler in Pakistan and therefore the low season for carbonated drinks, I accept Mr Leghari’s evidence on this, as set out in his witness statement.

Mr Leghari told Mr Segar and Mr McDonnell that Gul would like to launch carbonated and cordial Vimto at the same time in order to make a more effective launch in February 2012 after the winter months and in good time for Ramadan which began on July 18th 2012 which was the prime time for cordial sales. Neither of the Nichols’ individuals raised any objection to this.

By an email dated 12th December 2011, Mr Leghari set out the position to Mr Segar referring to the fact that the right time to have launched in 2011 was the beginning of Ramadan and that, since Gul was too late for that, samples of Vimto carbonate had been given to their distributors and referring to the fact that he had brought with him to Dubai a bottle which had been produced for that purpose. He referred to enlisting two senior sales managers for Vimto distribution and stated that Gul was in the process of finalisation of procuring its own filling line and capper for the cordial production, having ordered the design mould for the glass bottles. He stated in clear terms that February was anticipated for the market launch “as we will have all channels in order for a successful brand entry”. He referred to Mehran’s failure to do a proper marketing launch of Vimto carbonate in Karachi and the need for time to be taken in marketing rather than forcing the brand at a time of cold weather. “We want all aspects to be properly in play as Vimto is going to be having a first launch in Pakistan and we do not want to jeopardise the brand identity by moving in too quickly and half-heartedly.”

As Mr Segar accepted in cross-examination, he did not make any complaint at this suggestion nor put forward the idea that carbonated product should be launched in the winter period prior to the launch of cordial which had been delayed because of Nichols’ insistence on glass bottles for DS Cordial (after originally being agreeable to PET bottles). A suggestion of importation of finished DS Cordial had foundered because of the excise duty payable on such imports. An email of 5th January 2012 follows what appears to have been a monthly pattern of chasing up Mr Leghari for progress but I am entirely satisfied that Mr Segar agreed to a global launch of Vimto in February 2012.

This launch came to nothing because of the meetings in Dubai between 20th and 22nd February 2012 when Mr Segar made it clear that Gul was not to manufacture DS Cordial after all. The evidence from Mr Leghari was that, until the product was on the shelves in the stores, it was futile to market or advertise and so none of that had yet been done and none of it did take place because of Nichols’ renunciatory conduct.

It was thus Nichols’ actions and statements which prevented Gul from launching the drinks products at the end of February (or the beginning of March as, on Mr Leghari’s evidence, it would actually have been) and when Nichols confirmed its repudiatory stance in its email of 28th March, Gul was left high and dry in the face of Nichols’ refusal to abide by the terms of the contract. Nichols knew full well what the effect of its stance was on Gul and that Gul was not proceeding to manufacture because of it. It must have been clear to Nichols that Gul had not launched any product, whether DS Cordial or carbonate long before the 23rd July letter from Gul’s solicitors which formally accepted Nichols’ repudiatory breach.

Whether or not Nichols had agreed to a delayed launch, a decision by Gul to postpone launch of carbonated product in order to tie it in with the launch of DS Cordial was, on the evidence, a sensible marketing decision and could not amount to a breach in failing “diligently” to “carry out the business of manufacture and distribution of the Products”. As is plain from the evidence of products launched in Malaysia and Indonesia, there is often delay between the contract date and the date of launching because of the need for proper preparation. There was therefore no breach of clause 8.3.

In consequence instead of launching in March and obtaining the benefit of the summer season for carbonated drinks (the high season for such sales) and the two month period leading up to the month of Ramadan (the three month period constituting the high season for sales of DS Cordial) nothing was done at all as Nichols well knew.

It is accepted by Nichols that the third breach alleged is parasitic on the second breach and that, if the launch was properly delayed, no breach would arise in the context of clause 8.3.2 or 9.4. There were therefore no sales for Gul to report. Nichols knew of the stock of 500 litres of concentrate which had been purchased in July 2011 and of the manufacture for the distribution of free samples and had put Gul into an impossible position. There was in reality, nothing further to report.

I find that, had the contract been performed by Nichols, and sales been made by Gul with purchases of the minimum quantities of concentrate, Gul would have provided information under clauses 8.3.2 and 9.4 to the satisfaction of Nichols and that at the expiry of the five years, in accordance with Mr Leghari’s evidence, Gul would have exercised its option to renew and Nichols would have raised no objection. Any trivial breach in failure to report information at the outset would not justify a refusal to allow Gul to exercise the option and the thought would, in practice, not even have crossed Nichols’ corporate mind if the contract was otherwise being satisfactorily performed.

This is not however either a Laverack case or one which falls into any of Patten LJ’s four categories. It was submitted that, in the event of any breach at all, on the wording of this contract, Gul simply had no option to exercise. Subject to questions of de minimis I would be inclined to agree, but as I have found that there was no breach at all, the option rights existed at the time of acceptance of the renunciation. I therefore proceed to assess damages on the basis that, if the contract had been successful from Gul's perspective, it would have exercised the option to renew for a second period of 5 years, in accordance with the evidence of Mr Leghari.

The Economist Intelligence Unit produced a country report on Pakistan in February 2014.

Between 2009 and 2013 Pakistan’s GDP grew at rates ranging between 1.6% and 6.1% pa. It is forecast to grow at approximately 4% per annum in the period till 2018. Private consumption grew in the same past period at rates ranging between 0.7% and 4% per annum and is forecast to continue at 4% per annum. Private consumption is expected to continue as the primary driver of economic expansion. The population of about 185 million is expected to continue to grow by between 3-4 million people p.a. and the GDP per head is likewise expected to increase. Real GDP growth on an expenditure basis had accelerated to a 7 year high of 6.1% in 2012-2013 bolstered by a sharp increase in government consumption but that was expected to slow because of the fiscal deficit, whilst picking up again in 2018. Credit for the private sector was expected to increase with a corresponding expansion in gross fixed investment. Consumer inflation was expected to remain at an average of 7% per annum.

Other evidence showed the existence of a growing middle class in Pakistan of 35 million or more with aspirations to status when giving hospitality and with advertisements of international and premium drinks aimed at them which had proved successful.

I heard evidence from Mr Segar and Mr Grainger of Nichols, Mr Leghari of Gul and the two experts, Mr Sequeira and Mr Wilkinson who referred to various reports, surveys and other literature on the subject. Much of what follows appears from Mr Sequeira’s report.

The soft drinks market in Pakistan is primarily composed of carbonates (often referred to as “fizzy” drinks) and concentrates. Carbonated drinks are typically sold in “ready to drink” or “RTD” form whilst concentrates are sold in powder or liquid form (cordials) and are required to be mixed with water before consumption. Between 2007 and 2012 the off-trade sales of carbonates increased from 494.5 to 674.5m. litres, whilst those of liquid concentrates increased from 6.9 to 9.6m. litres and those of powder concentrates from 1.3 to 1.6m. litres. The sales volumes for carbonates appear in RTD form but the liquid concentrate numbers are reported as sold (i.e. before dilution). The rule of thumb is that one kilogram of powder concentrate produces 7.4 litres of RTD product whilst 1 litre of liquid concentrate produces 4.6 litres of RTD product. Both carbonates and liquid concentrates have experienced significant growth from 2007 to 2012 with a Compounded Annual Growth Rate (CAGR) of 7.3% for carbonates and 6.8% for liquid concentrates. Liquid concentrate consumption is forecast to grow at a CAGR of 5.8% in the foreseeable future.

Relying on the Euromonitor research, Mr Sequeira’s evidence was that the market for concentrates in Pakistan currently enjoyed better growth prospects and margins compared to carbonated soft drinks and packaged juices, essentially because concentrates, and in particular liquid concentrates, were considered healthier and cheaper alternatives to carbonated RTD products and because retail outlets found it easier to store concentrates because they did not require refrigeration, thus ensuring a wider network of distribution.

In terms of sales revenue, the liquid concentrate market grew at a CAGR of 25.7% between 2007 and 2012 and was expected to grow at an annual rate of 8.2% when inflation is taken into account.

In 2011, four brands accounted for over 76% of the Pakistan liquid concentrate market in terms of sales volume. Rooh Afza, the market leader, had a 28.2% market share, Jam-E-Shirin had 17.5%, Shezan Mango Squash had 15.5% and Mitchell’s had 15.1%. Other liquid concentrate products had a maximum of 2 or 3%. The market drew a distinction between dark coloured syrups such as Rooh Afzah, Vimto, Jam-E-Shirin and Gulbahar and fruit squashes such as Shezan, Mitchell’s and Lychee. Dark coloured syrups can be diluted with milk and water and have higher per glass conversion rates whilst the fruit squashes can only be diluted with water and have lower conversion rates. The dark coloured syrups therefore generally retail for a higher price in the market. The intention was to market DS Cordial at a considerably higher price than those available in the current market and to attract customers in the upper middle classes- a target group of about 35m people. Notwithstanding that target group, on the evidence of Mr Leghari, bottles of DS Cordial could be “stretched” in use so that instead of the recommended twenty glasses (of about one third of a pint, diluted at a ratio of 5:1) per bottle of 710 ml, an economic consumer could eke the bottle out to obtain as many as fifty glasses.

Rooh Afzah, the market’s leading concentrate, is a red syrup that is produced by Hamdard, a company based in India, with a recipe that dates back over 100 years. It has been manufacturing the product in Pakistan since 1948 and enjoys a large stable customer base there. The view of Euromonitor in November 2012 was that lack of innovation could cause the liquid concentrate market to falter in the future five years despite the products being healthier and more cost effective. A stagnant range of products would keep consumers from choosing concentrates over RTD products.

The market dynamics of the liquid concentrate segment were (and are) very different from that of the carbonates segment where there were over 25 major products, including international brands such as the range of Coca Cola and Pepsi products that commanded significant market share as well as other brands, including Pakola, Apple Sidra and RC Cola, which Gul itself distributed. In the liquid concentrates segment there were by contrast only a handful of major products, including the four major players to which I have already referred.

In consequence it was the general view that the carbonates market was much more competitive and that introducing new products into that market was much more challenging than in the liquid concentrates market. Coca Cola and Pepsi enjoyed economies of scale and strong advertising and marketing support in the former. It was Mr Leghari’s evidence that they were aggressive in eliminating competition by pressurising distributors and retailers not to stock competing products. Mr Leghari’s evidence was that the Pepsi and Coca Cola range of drinks competed directly with some products sold by Gul, such as R.C. Cola, Suncrest and Bubble-Up but not with Pakola or Apple Sidra where Gul used the same distributors as these major international companies. Euromonitor noted, in relation to carbonated soft drinks, that international brands and manufacturers dominated the market and that the leading brands were all best selling international brands at reasonable prices making competition from local players virtually non-existence. The resounding success of the category’s leading products left little room for new entrants.

By contrast, there was a real market opportunity in the concentrates market to introduce a cordial such as Vimto DS Cordial which had proved itself to be highly popular in Islamic countries in the Middle East. It was a prestige drink but in some countries, such as Saudi Arabia it had become the traditional drink to end each day of fasting during the period of Ramadan. Whilst the Vimto recipe was invented over 100 years ago in the UK, it has actively promoted its brand in international markets. In particular, Vimto’s trademark was registered in India in 1923 (including what is present day Pakistan) and was introduced to the Middle East in 1928. Approximately half of Nichols’ soft drink sales derives from concentrate products whilst half derives from carbonated products. The SS Vimto cordial is popular in the UK whilst DS Vimto cordial is popular in the Middle East. The latter is not only more concentrated, but sweeter than the SS version.

Aujan Industries (Aujan) has been a longstanding distributor for Nichols in the Middle East. It is the largest independent manufacturer and distributor of soft drinks in the Middle East and North Africa region (MENA). Its core markets are the GCC countries of Saudi Arabia, Kuwait, Bahrain, Qatar, UAE and Oman, but its operations also extend to Iran, Iraq, the Levant and North Africa. Aujan obtained exclusive rights to import and distribute Vimto cordial in 1928. Since its early days, people in the Middle East have associated DS Vimto cordial with providing an energy boost which made it an ideal drink for energising the body after a day of fasting. DS Vimto cordial has therefore become the beverage of choice for breaking the fast and its image has become synonymous with Ramadan. Approximately half of Aujan’s annual sales of Vimto are transacted during the month of Ramadan or during the two months preceding it.

DS Vimto cordial has become a popular ingredient for other recipes also and its consumption has enjoyed strong growth over the past decade in the Middle East. In 2011, Aujan’s annual sales of DS Vimto cordial in MENA exceeded 31 million bottles, reflecting an annual growth rate of approximately 20%. Vimto enjoyed a 42% market share within the liquid concentrate market in Saudi Arabia and a 40% market share in the UAE. Its growth is expected to continue as the brand deepens its market presence in the region. Aujan and Coca Cola announced a deal in December 2011 whereby Coca Cola acquired a 50% stake in Aujan Industries for US$980 million. This values Aujan’s beverage business enterprise at approximately US$2.23 billion which gives some indication of the value of the Vimto product line in the Middle East.

Nichols has also successfully sold DS Vimto cordial in other countries in North Africa such as Somalia, Djibouti, Eritrea and Ethiopia. Disclosure by Nichols showed sales of DS Vimto cordial in North Africa and Yemen totalling 8.5 million bottles in 2013, a significant increase since 2011.

Aujan’s distribution rights for Vimto do not include Pakistan but it is clear that volumes of DS Vimto cordial have been imported into Pakistan from Dubai and Saudi Arabia for many years. This constitutes the “grey market” upon which the fact witnesses and experts commented. There was dispute as to its size but the product retailed at a significant premium over other concentrates, such as Rooh Afza. Whereas Rooh Afza would retail in the range of 128-143 rupees per 800 ml PET bottle, DS Vimto cordial would sell on the grey market in glass bottles, at a price of somewhere between 320 and 330 rupees in the top-end urban stores in places such as Karachi.

The Euromonitor International assessment of the concentrates market in Pakistan dated August 2013 reviews the period from 2007-2012. The trends which it notes are as follows:

Liquid concentrates, such as Rooh Afzah and Jam-E-Shirin are regarded as healthier and cheaper alternatives to carbonates or packaged fruit/vegetable juice. This perception was one of the major reasons for vast numbers of Pakistani people switching to concentrates towards the end of the period 2007-2012.

The ease of storage of concentrates, as compared with carbonates also assists because refrigeration is not required.

The 4% off-trade volume growth recorded in 2012 is less than the compound annual growth rate of 7% recorded over the period 2007-2012. This was due to high levels of financial pressure faced by Pakistani consumers resulting from rising prices and lack of innovation in the category. Consumers were not offered any new choice in concentrates which could potentially revive their interest in the category.

Powder concentrates recorded faster growth in 2012 than liquid concentrates due to the rising demand for products offering convenience and value, making powder concentrates more popular than liquid concentrates. A wider range of flavours was available in powder concentrates than in liquid concentrates which represented a stark comparison with the leading brands in the latter where Rooh Afza had always been and was likely to remain available in one flavour only.

The concentrates category as a whole was becoming more price competitive. The 5% unit price growth in 2012 was due to increases in taxes and rising inflation only.

Liquid concentrates, especially the leading brands were widely regarded as rather old-fashioned and lacking innovation. There had been no change in decades. This had resulted in slow off-trade volume growth with liquid concentrates as compared with powder concentrates.

Retail distribution was relatively wide because of the absence of the need for refrigeration.

Concentrates were consumed by people from all income groups and social classes in Pakistan.

Rooh Afza was a well-established brand in liquid concentrates and it and its manufacturer were regarded as home-grown successes which had become household names by offering relatively healthy soft drinks. Purchasers of Rooh Afza and Jam-E-Shirin registered the highest increase in value sales in concentrates in Pakistan during 2012 because their loyal customers were more than willing to pay more to purchase those brands with recent price hikes.

Domestic concentrates, brands and manufacturers completely dominated the market in liquid concentrates whilst international brands and manufacturers played a major role in powder concentrates only.

So far as future prospects were concerned, the concentrates market in Pakistan was expected to continue recording positive growth over the period until 2018 despite the fact that it was a category in which there was little by way of product innovation. That and the inherent instability of the Pakistani economy, rising production costs and the increasing focus on reducing costs and maximising profitability remained the major reason for the stasis in new product developments in the category. That trend was expected to remain in effect until 2018 and was likely to present a challenge in maintaining consumer interest in concentrates over the longer term.

Powder concentrates were expected to fare slightly better over the course of the ensuing years in terms of growth, rising from a smaller sales base than liquid concentrates.

Price discounts offered for bulk purchases of liquid concentrates in leading supermarkets and hypermarkets in Pakistan were set to remain in effect during the forecast period, especially for products purchased by the dozen.

By way of contrast, the equivalent review for carbonates, dated August 2013, noted the increase in off-trade volume by 6% in 2012 and an increase in average unit price by 1% in current terms. Coca Cola had a market share of 40% and the market was expected to increase in volume at a compound annual growth rate of 7% over the period until 2018. The prices charged for the carbonates of PepsiCo and Coca Cola remained static in 2012 whilst the 6% off-trade volume growth recorded for the year was commensurate with the 6% compound annual growth rate over the period 2007-2012. Carbonates continued to face stiff competition from other soft drink categories such as fruit/vegetable juice and concentrates. Rising awareness about the health problems which had been associated with excessive consumption of carbonates compromised volume growth in the category towards the end of the 2007-2012 period. Because of the high level of electricity load shedding in Pakistan, demand had declined because carbonates could not be properly chilled by retailers or householders.

Cola carbonates increased in off-traded volume at a slightly faster rate than non-cola carbonates during 2012 with low calorie cola carbonates recording the fastest volume growth rate.

Carbonates remained the most common type of soft drink on offer in Pakistan’s consumer food service outlets and the key consumers of carbonates in Pakistan remained young men and women. Serious carbonates consumption began in earnest with youngsters in the early teens. The majority of consumers were between the ages of 18 and 30. Carbonates were popular in all of Pakistan’s income segments and in both urban and rural areas of the country. They remained the most popular soft drinks choice for those entertaining guests at home. Substitutes for carbonates included concentrates, fruit/vegetable juice and bottled water.

Future prospects were said to be limited by the growing popularity of soft drinks in other categories such as concentrates and fruit/vegetable juices and the rising awareness of the potential health problems which could derive from excessive carbonates consumption. As more than half of the Pakistani population was illiterate however, this meant that they generally failed to understand the detrimental effects of consuming large amounts of sugar and regularly consuming carbonates. Price competition was set to remain an important feature during the period to 2018 as the two leading players in the market were expected to compete fiercely for volume share. The launch of new flavours and variants was expected, both from international and domestic companies as a way of accessing niche demand within carbonates, a category which had been static for many years.

On the basis of this assessment, there can be seen to be room in the concentrates market, in particular, for a new product which Gul intended that DS Cordial should fill. The four leading brands dominated the market with a 76- 78% market share between them but none had made any change to their product for decades with the result that they were regarded as old-fashioned. In the carbonates market, the two leading brands of Coca Cola and Pepsi Cola had between them a market share of some 88% in 2012 whilst Vimto carbonates, as imported by Aujan, represented 0.2% of the market. New products or variants were expected from both international and domestic companies in the carbonates market and whereas there were international brands in the powder concentrates marked, there were no international or premium brands involved in the cordial market at all. As matters stood in 2012, both carbonates and concentrates were consumed by people from all social and income classes in Pakistan.

Mr Leghari, to whose expertise I shall subsequently refer, set out, in his witness statement why he considered Pakistan an ideal market for a drink like Vimto. Pakistan has very hot temperatures, so that cold beverages play an important role in everyday life. It is furthermore the tradition to treat all guests with refreshment and as it is largely a Muslim country, alcohol is not publicly available. Vimto is one of the most popular Ramadan drinks in the Arab world ever since Aujan started to manufacture and distribute it in the Gulf region. Pakistan itself is highly influenced by the Middle East. It is close to it both geographically and culturally. After the independence of Pakistan, many Middle Eastern wealthy individuals came to live there bringing Vimto with them. Pakistanis frequently travel to the Arabian Peninsula which is a leading religious site for pilgrimage. They also travel to Dubai for holidays. In consequence they have seen and tasted Vimto. Cable television channels from the Middle East, like Al Jazeera frequently show adverts for Vimto as a status drink.

Gul’s perception was that if Vimto was the number one product in the place people spent their holidays or to which they travelled, the brand would be very successful if it became available locally in Pakistan. Vimto’s unique flavour and name were known in Pakistan and with a population of approximately 180 million and growing, the vast majority of whom were Muslims, there was an opportunity to grasp. Not only does Pakistan have one of the largest Muslim populations in the world but Karachi is one of the largest cities in the world in terms of population (13 million) with a thriving middle class. Vimto was imported into Pakistan from Aujan but was only available in limited quantities and through exclusive shops and at a price significantly higher than other beverages in Pakistan in consequence. There was some brand awareness but the main obstacle for consumers was the price and lack of marketing and distribution channels. Gul considered it could make good these deficiencies.

Of particular interest to the Pakistani market was Vimto DS Cordial because of the influence and similarities with the Middle Eastern culture. It is only the DS version that is produced and sold in the Middle East so that is the product with which Pakistani people are familiar. It is especially popular for breaking fast in Ramadan, during which period DS Cordial sales sky rocket. The extra sweetness of taste of DS Cordial is appreciated and mixed with water or milk. During pilgrimage months, Muslims who travel to Mecca in Saudi Arabia drink Vimto DS Cordial and bring home bottles of it as gifts. So it has become something of a ritual drink amongst the Arab nations as well as Muslims in India and Pakistan. A link between DS Cordial and Middle Eastern culture is shown on Nichols’ own website and an article published by the BBC.

Mr Leghari was therefore convinced that there was huge potential for Vimto DS Cordial in Pakistan. It was considered a premium product across the Middle East as is clear from the nature of television advertisements produced by Aujan which show it enjoyed by affluent, good-looking people, including some in chauffeur-driven vehicles, with up-to-date computers and the like. There was a desire for international or premium brands amongst the growing middle class of Pakistan and at the time when Mr Leghari first approached Nichols in 2009 and thereafter, there were no other international cordial brands manufactured in Pakistan and he considered that the market potential for Vimto had been overlooked.

This perception was, unknown to Mr Leghari, shared by Nichols who entered into licence agreements with Mehran, Sunrise and Continental in the years prior to conclusion of the agreement with Gul in September 2011, when at the same time, it concluded a yet further distributorship agreement with Mehran, dividing up the various Vimto products and provinces between them. Nichols make much of the failure of these licensees to make any significant headway with Vimto in Pakistan but the deficiencies of each of them is clear from the material put before the court. Mehran had a licence which pre-dated 2001 but had not purchased any concentrate at all between 2001 and 2004 and obviously had, at that stage, no interest in the product. The licence was terminated by a letter dated 25th February 2005 when Nichols was looking to conclude a licence agreement with Continental Beverages in relation to the Sindh area. By that time a licence had been agreed with Sunrise on 26th May 2004 for a different area but the product was launched in September 2004 which, since the soft drinks market in Pakistan is depressed from October to March (with only 20% of annual sales taking place in that period) was not a good idea. Nichols own business plan recognised that 70% of the annual volume of soft drinks was consumed in the period April to September. Despite Sunrise increasing its number of distributors from 50 to 65 and then 80, its sales were disappointing and the contemporaneous documents show its failures in replenishment of stocks and distribution despite positive reaction from retailers and customers. The view taken by Mr Grainger, as revealed by his reports, was that Sunrise could increase its sales and distribution. Sales targets were reduced to a seventh of the original quantity but Sunrise achieved little. The agreement was terminated in December 2007.

Continental was given a licence on 27th March 2005. It also missed the summer season before launching in November and there were issues about availability of PET materials. Nichols expressed unhappiness with Continental’s sales in September 2006 and March 2007 and the purchase requirements were adjusted to one fifth of the previous targets. There was no improvement between 2007 and 2010 and this was considered to be “chronic underperformance”.

Mr Grainger was a most unsatisfactory witness who sought to argue the case on behalf of Nichols and refused to accept the clear evidence of his views expressed in his meeting notes at the relevant time. He did however say that he sought to set minimum requirements for purchase or sale at realistic levels for the franchisees. He said he put a lot of support into the licenses and if Gul had wanted support, Nichols would have supplied it.

The potential for the market as seen by Mr Grainger is revealed by his notes of meetings with Nichols’ franchisees. By way of example, in September 2005 he reported that there was an opportunity to market a DS Cordial to capitalise on the demand created as a result of the success of the product in Saudi Arabia, particularly during Ramadan. He referred to a clear opportunity with a number of requests received from importers in Karachi who wished to distribute DS Cordial in the region. The cost of import duty made importation unattractive. The notes record his view that “There is certainly demand for Vimto cordial in Pakistan and Aujan Industries of Saudi Arabia unofficially export around 10,000 cases to Karachi.” In April 2006 there is an entry and meeting note to much the same effect and reference both then and in May 2006 to the importation of 10,000 cases of Saudi manufactured DS Cordial, mainly for Karachi. In meeting notes for 28th June 2006 with another company, reference is made to Aujan’s own figures which suggest “official imports of DS Cordial into Pakistan at 10,000 cases per year”.

It is clear that Mr Grainger was enthusiastic about the opportunities for Vimto in Pakistan from the persistence with which Nichols continued with franchisees. He was particularly keen on exploiting the opportunity that he saw for Vimto DS Cordial, although he was not able to persuade any of the franchisees to take this up. Their failures, as recorded by Mr Grainger, all related to attempts to sell Vimto carbonated product, rather than DS Cordial in the areas of Pakistan for which they were given a licence. The DS Cordial opportunity remained unexplored.

In January 2010 Mr Segar took over responsibility for Pakistan from Mr Grainger and entered into discussions in that year with Gul and Mehran. Gul expressed interest in both carbonates and DS Cordial from the outset and in an email of 18th May 2011 Mr Leghari stated that “cordial remains the backbone for our operations in Pakistan”. By the terms of the Agreement and amendment letter (as rectified to reflect the parties’ agreement) Gul was given the franchise to sell carbonated Vimto in various sized PET bottles in all parts of Pakistan other than Karachi and Vimto DS Cordial in glass bottles throughout the whole of Pakistan. Mehran was given the right to sell carbonated products in Karachi and in Tetrapak throughout Pakistan.

Despite the absence of formal written business plans, I have no difficulty in accepting Mr Leghari’s evidence as to the strategy he had. He knew that Aujan exported Vimto DS Cordial to Pakistan, even though it did not have a licence to do so in Pakistan and sold to consumers at prices ranging between 280 and 400 rupees a bottle. Gul’s plan was to sell DS Cordial at 220 rupees a bottle and, by selling at a discount to Aujan, to take over and increase the existing market share that Aujan had developed. Gul, without the need for shipment from overseas, by manufacturing locally, could undercut the existing grey market, particularly given the favourable start up prices negotiated for the concentrate with Nichols. Distributors were also much more inclined to work with local manufacturers than with importers because of the consistency of supply.

The most popular cordial sold in Pakistan was and is Rooh Afza, which is a non-alcoholic fruity concentrate which is also popular during Ramadan. Mr Leghari’s contention was that DS Cordial would remain a premium product in comparison to Rooh Afza, which retailed at anything between 125 and 180 rupees per PET bottle. Mr Leghari considered that it was produced essentially for the lower to middle classes in Pakistan. DS Cordial would be that much more expensive but it would also carry a much more attractive commission rate for distributors, namely 40 rupees per bottle as compared with 20. This would constitute a huge incentive to distributors.

On Mr Leghari’s evidence, experience showed that different distribution models worked with different products. Incentives to distributors in the shape of higher commissions had however proved very effective for Pakola and Apple Sidra, where discounts on price made little difference. Gul operated entirely on a cash basis and had no bank borrowings at all.

It is clear from the evidence of Mr Leghari that, following the signing of the contract, effective steps were taken by Gul to prepare for production and sale of DS Cordial and carbonates. The market survey was effected by the Gul sales team in October and November 2011. Upgrades and acquisitions of plant for the factory in Sukkur were effected, including structural modifications to the building. Three 5,000 litre water mixing tanks, a 16 valve filling machine with a capacity of 4,800 bottles per hour, a new 8 head capping machine, a PET bottle blowing machine and a shrink wrapping machine were all purchased. Four trucks and two Suzuki pick-ups were acquired to transport bottles from the factory to the distribution centres and, although Metro refused to stock DS Vimto in prime location on the “A” shelf alongside Rooh Afza, Gul compensated for this by leasing and renovating warehouses in Karachi, Lahore and Islamabad as regional distribution centres whilst purchasing other vehicles to transport the product from these warehouses to the distributor locations. Additionally, it planned a marketing and promotions campaign for Vimto, retaining an advertising firm (Ace Marketing and Advertising/Trade Vision) for the development of a launch plan for Vimto including billboards, banners and media spots in the three cities already referred to and three further cities, namely Faisalabad, Multan and Peshawar. By March 2012, it had recruited “Team Vimto” – a team of 10 dedicated sales personnel for Vimto products.

The basic thrust so far as DS Cordial was concerned was to take over the grey market immediately and work outwards from that through the distributors. On the back of the survey results, Mr Leghari saw no difficulty in putting the Vimto products along with Pakola, which he already distributed and which therefore gave him leverage.

As Gul’s current production is significantly higher than the projected values in Mr Sequeira’s profit calculations, it is clear that Gul had no potential for production problems. The only risk in the plan was that Gul would not sell as much Vimto DS Cordial or carbonated products as Mr Sequeira suggests. The fact that Metro would not put Vimto on its “A” shelves was not of any great significance as it was not the only distribution channel. Gul was planning on direct distribution to retailers in Islamabad and Lahore and in rented warehouses there for that purpose. Approaches would be made to retailers in those cities to cut off the grey market and then integrate backwards into the distribution network. There would be no real difference in cost because paying Metro commission and selling direct to retailers with distribution and transport costs roughly equated.

Whilst the Pakistan cordial market was heavily driven by the lower middle class which was sensitive to price, the aim was to attract the upper middle class market where there was evidence that international brands had done well in other fields, including the carbonated drinks market. Premium brands and upper middle class consumption was driving much consumer growth in Pakistan at the time. Although there was some risk in the carbonate market, because the margins were low, that business might need to be funded for some years, in the cordial market, the grey market business would easily be gained without much infusion of capital so the challenge was in scaling up business in a market which Euromonitor predicted would grow by 5.8% per annum. In fact, the liquid concentrates market has grown by 6.8% over the last five years, whilst the carbonates market has grown by an average of 7.3% in that period.

It is for Gul to prove its loss. Nonetheless, in circumstances where Nichol renounced the agreement so that no sales took place upon which any future projection of sales could be placed, I bear in mind the “fair wind” principle set out (inter alia) in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] 1 CLC 662 by Leggatt J at 709A:

In the context of the current action, Gul’s expert has gone to considerable trouble to project future sales in the counter-factual situation whilst Nichols’ expert has offered no opinion of his own as to the appropriate figures, seeking merely to pick holes in Gul’s expert’s approach and to minimise the loss suffered by Gul. Whilst there is no question of reversal of proof of loss, I considered that it is appropriate to think in terms of a “fair wind” particularly when Mr Sequeira has sought to be cautious and realistic in assessing both the grey market and in extrapolating from the Foresight survey which might have suggested larger losses than those put forward by Gul.

The foundational points for his calculations of loss are represented by the price payable for the concentrate, which was fixed by the Agreement and the price at which Gul was to sell the product. Both Mr Segar and Mr Grainger agreed that 260 rupees for a 800 ml PET bottle of DS Cordial was realistic and that more could be charged for a glass bottle. Mr Leghari’s evidence was that he would not consider going below 220 rupees for the glass bottles and it appeared that Mr Segar approved of that stance. Because DS Cordial was a premium product, part of its appeal was the premium price, over and above any other cordials in the market, it being the aim to target the aspirational upper middle class and the status attached in offering such a drink to their guests by way of hospitality.

With clear demand, as revealed by Nichols’ own documents and Aujan’s sales on the grey market, understated by reference to 2006 figures, the question of sales into that target group in particular but also elsewhere, as previous sales in the Foresight survey show, is not susceptible of a certain definitive answer. In reaching conclusions on the balance of probabilities however, I am entitled to approach Gul’s evidence and Mr Sequeira’s calculations on the basis that Aujan was extremely anxious not to allow Gul into the market and so pressurised Nichols that it repudiated the Agreement. Whilst the expertise of Mr Wilkinson in his own field is not challenged, he had no specialist knowledge in the drinks industry and had carried out no independent research of his own whilst attacking Mr Sequeira’s conclusions based upon the market research he had done and the evidence of Mr Leghari who did know the market. I consider that it is only right in these circumstances to view Nichols’ contentions with a measure of scepticism.

The Leghari family have worked successfully in the soft drinks and beverages industry for three generations with a good reputation for managing franchises in Pakistan. The family companies secured franchise rights for Coca Cola and Fanta from 1969 to 1983 and then switched to Pepsi from 1983 to 2006. A distribution network was built up across Pakistan.

In 2007 Mr Leghari’s father sold his stake in the family company with the Pepsi franchise and purchased Gul as a company for Mr Leghari and his brother to run independently, developing other brands which were not permitted under the Pepsi licence. Following purchase, Gul had one factory and with Mr Leghari’s father as chairman and himself and his brother as directors, Gul benefited from the family experience acquired previously, although in 2011 Mr Leghari was only 30 years old. In the first few years, Gul improved its production facility and focussed on expanding its brand portfolio before moving on to focus on developing sales.

Gul is the number one provider of fruity beverages in Pakistan, using the same distributors as PepsiCo and Coca Cola for those drinks (Pakola and Apple Sidra) which do not compete with their range of products, which includes Fanta, Sprite Seven-Up and Miranda. Gul has the franchise rights to several international fruit flavoured and cola flavoured soft drinks and a distributorship network across Pakistan. The licence agreements and distribution contracts are for terms of ten years. The brands manufactured and sold include Pakola, Apple Sidra, RC Cola and three brands owned by the Monarch Beverage Company of Atlanta, namely Bubble Up, Suncrest and most recently since 2013, Kickapoo Joy Juice.

The distribution network for Pakola, in particular, which would not be a competitor with Vimto DS Cordial, provided an opportunity for Gul in the sales of the latter. It would be able to deliver and sell DS Cordial on the back of its existing distribution and sales network for Pakola.

I was impressed with Mr Leghari’s understanding of the drinks market in Pakistan. He was an accountant who had been educated and had worked in the United States. Although young in business terms, his familiarity with the soft drinks industry through his family association was evident. Whilst criticism was made of the absence of detailed written marketing plans, it must be borne in mind that this was a family owned Pakistani company where, on the evidence I heard, it was possible to switch from manufacturing one drink to another in a very short period of time and for concentrate from dedicated tanks to be processed, bottled and delivered to the shelves of retailers in less than 24 hours if PET bottles were used. The matter was more complicated when glass bottles were required but I was left in no doubt of Gul’s ability to manufacture and launch products onto the market with an efficient distribution and sales network.

Mr Leghari was the subject of direct attack because Gul maintained two sets of accounts. Mr Leghari was straightforward in explaining the corrupt practice in Pakistan of retaining one set of accounts for the taxman and another set of management accounts that reflected the reality. I have no difficulty in accepting his evidence on this point since the figures in the management accounts, where verifiable, were seen to be correct. What they showed was growth in profits in the years ending 30th June 2011, 2012 and 2013 from £116,000 to £150,000 to £220,000 and a CAGR of approximately 20% between 2007 and 2013.

There was also growth in sales volumes in every year from 2008 to 2013 with steady increases from 2009-2012 and an increase of about 50% in terms of volume between 2012 and 2013. The average sale price per litre is irrelevant because of the product mix, whilst the turnover was the subject of constant increase from 2007 onwards.

I heard evidence from Mr Chow, the Vice-President of Sales for Asia at the Monarch Beverage Company Inc. He spoke well of Gul and its well-established distribution network and its nationwide performance in the distribution of Bubble Up and Suncrest. He referred to Gul’s investment in its production facilities, advertising and distribution network. Its point of sale advertising and in store materials for Monarch’s brands and its purchase of new glass bottles for Bubble Up demonstrate its abilities. He considered the Leghari family to be prudent businessmen and he had an excellent relationship with Mr Leghari himself. He considered Gul a good licensee with excellent manufacturing facilities. It was able to and did pay on time: it implemented advertising campaigns and promoted the brands. It was capable of delivering increases in sales and expanding its franchise and communicated and reported regularly, providing feedback on the market in general and on competition. Because of its performance in relation to Bubble Up and Suncrest, in 2013 the decision was taken to launch Kickapoo in Pakistan through Gul. He would not consider using any other bottler in Pakistan save Gul.

Prior to using Gul, Monarch had encountered difficulties in finding a reliable licensee in Pakistan. Arrangements with Hatco, Mehran and Continental had all proved unsatisfactory. Continental was wholly unreliable in making payment and the venture never got going. It lasted less than a year. Mehran let Monarch down and although it did purchase concentrate, it was very “stop-start”. There was no regular commitment. By contrast, Gul consistently bought concentrate and it met the purchasing targets in 2010/11 but by agreement no purchases were made in 2012 because Gul had too much stock. Monarch required Gul to produce and sell a minimum of 500,000 litres of beverage and a failure to do that was a breach of the agreement but Monarch had never terminated a distributor for such a failure. The targets were deliberately “stretch targets” which were difficult to achieve in the early years of a licence but which were aspirational and would help to establish the brand in the market. Such targets were sometimes set too high, and when taking over a brand such as Bubble Up, he would not expect Gul to have hit the target immediately or for it to meet the minimum sales target in the early years after the launch of Kickapoo. He was very pleased with the progress made by Gul since 2010 and was currently in negotiation of a 25 year licence for it to sell all three Monarch products currently licensed which showed Monarch’s confidence in Gul and the desire to enter into a long-term co-operative relationship.

There was, by the time Mr Leghari had finished giving evidence, no doubt as to Gul’s production capacity and its ability to manufacture the quantities of Vimto required to achieve the sales predicted in Mr Sequeira’s expert report. It had the market knowledge, it had the distribution system and it had the expertise required for advertising, marketing and selling both DS Cordial and Vimto carbonated drinks. Gul knew that there was an untapped market for DS Cordial because of the grey market sales to which I turn next but it did not have experience in marketing a premium product in that market. That was the unknown element and the real issue was whether or not sales of the order of those projected by Mr Sequeira, ex post facto, could be achieved.

Aujan plainly had figures for its imports into Pakistan in 2006, as appears from Mr Grainger’s notes of meetings with it. It appears to have had distributors in Pakistan known as Al Shakil. Its business in Pakistan was of sufficient size for it to want to prevent Gul from manufacturing in Pakistan. The inference is that, along with its increase in sales into other areas, its sales into Pakistan had also increased over and above the 10,000 cases (120,000 bottles) of DS Cordial to which Mr Grainger’s meeting notes refer in 2006. Equally, the Euromonitor literature shows that Aujan had, with Vimto carbonates, a 0.2% of the carbonates market in Pakistan. Aujan’s market in both DS Cordial (something in excess of 10,000 cases) and its 0.2% market share in the carbonates market were available for capture by Gul.

There was considerable dispute between the experts as to the size of the “grey market”. I have no doubt that, as Gul contended, Nichols could have obtained figures from Aujan as to its actual sales into Pakistan. Of course, there may have been entrepreneurial sales by others purchasing Vimto products from Aujan in Saudi Arabia and shipping them to Pakistan, but the evidence suggests that it was Aujan itself, almost certainly through its distributor Al Shakil, which was responsible for sales in Pakistan. This was, as I have already said, the reason for its protectionist attitude and the pressure it put upon Nichols not to allow production of DS Cordial in Pakistan by Gul.

Nichols, through its expert Mr Wilkinson, contended that the grey market in DS Cordial was much smaller than Aujan’s outdated figures suggested. The argument was largely based upon the Foresight survey which was conducted at the instigation of Mr Sequeira in order to form a view as to the sales of DS Cordial that Gul would have achieved over the ten year period of the Agreement. The survey did not therefore focus upon the top-end stores in Karachi which were reputedly selling significant volumes of DS Cordial at high prices to the wealthier elements of Pakistan society but, as appears hereafter, was directed at 4/5 different types of stores, namely general stores, self-service stores, kiryana stores and bakeries. Amongst the self-service stores were the top end stores. 2789 retail stores were surveyed, of which 1926 were general stores, 392 were kiryana stores, 227 were self-service stores and 244 were bakeries. The survey was stratified, inasmuch as stores were randomly selected within the four categories in question, the self-service stores including within the category the type of stores most likely to sell significant quantities of DS Cordial on the grey market. Self-evidently therefore, the figures which emerged from this survey did not, and were not expected to, give a reliable figure for the existing grey market but a sample and an extrapolated conservative representation of what urban stores in the three cities had been selling in the past with a view to determining what they could be expected to sell in the new circumstances which would obtain under Gul’s distribution plans.

The questionnaire, to which I shall return later in this judgment, included the following questions:

42 out of the 2789 retail stores sampled had historically sold Vimto DS Cordial via the grey market and the retail sales price was in the range of 310-350 rupees per bottle. The median sales volume was 12 bottles per year.

Mr Wilkinson, using the results of the survey responses to the questions relating to past sales, extrapolated from the results a grey market figure of 28,585 litres which constitutes approximately 42,260 bottles, about one third of the grey market figures reported by Aujan in 2006. Notwithstanding Mr Leghari’s evidence and the market research which shows the unreliability of supply in the grey market, this figure is plainly unrealistic in the light of the recorded figures in 2006, Aujan’s increasing volume of sales, the expansion in the Pakistani economy, the growth of the population, the increase in the GDP per head and the increasing middle class of 30-35 million people with increased spending power and aspirations of status.

Despite Mr George’s analysis of past sales city by city as revealed in the Foresight survey, the survey figures themselves cannot be relied on for the purpose to which Nichols wishes to put them. 20 stores out of the 722 surveyed in Karachi had sold DS Cordial, 8 stores out of 134 in Lahore and 13 out of 727 in Islamabad. As Mr Sequeira said, if a reliable estimate of the grey market was to be based on a survey, that survey would have to be directed to the type of stores that were known to effect sales of the product in order to carry out random and representative sampling of that category.

I conclude that Aujan’s figures for 2006 represent a conservative figure for the grey market in 2012 and have no doubt that Aujan’s own figures for DS imports into Pakistan in 2012 would have shown a much larger figure had they been produced to the court. I am confident also that it was within Nichols’ ability to obtain such figures and I am entitled to infer that it failed to do so because it had a good idea of what the figures would reveal or that it did do so and has kept quiet about the results, a piece of conduct which would be consistent with the manner in which it has conducted this litigation.

If this market was to be captured by Gul which, with any sensible amount of advertising and marketing was inevitable, given the price differential between Gul’s projected price of 220 rupees, as compared with grey market prices of 330 rupees and more, Gul was well on its way to meeting the minimum purchase quantities of concentrate required by clause 9.3 of the Agreement. 10,000 cases amounts to 120,000 bottles of 0.710 ml, amounting in total to 85,200 litres. The evidence was that 1 litre of concentrate purchased from Nichols would produce 80 litres of Vimto DS Cordial or 700 litres of RTD carbonate. 85,200 litres of DS Cordial would therefore require the use of 1065 litres of concentrate.

I have already referred to the discounted cash flow (DCF) methodology used by Mr Sequeira to quantify Gul’s alleged loss. The “Navigant model” sought first to project the revenues that Gul would have generated from this sale of Vimto product and then to project the cost that it would have incurred to realise those sales. The cash flows that would have been generated are then calculated. A discount figure is then assessed before being applied to establish the “present value of the future cash flows”. Mr Wilkinson, the defendant’s expert, accepted this methodology. In the course of the trial I expressed doubt as to the appropriateness of using a Capital Asset Pricing Model (CAPM) in calculating a discount rate to be applied, putting to one side simply a discount for the accelerated receipt of profits which is plainly required. The effect of what the experts sought to do was to value the contract rights as at the time of breach rather than simply assess the revenue stream and expenses incurred in obtaining it over the life of the contract. To my mind, valuing a contract at a particular date would take account of the uncertainties which lay in the future and which would be factored in. The court’s task however is, on the balance of probabilities, to decide how the contract would have worked out, taking into account those uncertainties in deciding what would, on the balance of probabilities, have taken place. The capital valuation on day 1 of a contract will not therefore necessarily equate with the lost profits assessed by the court on the balance of probabilities, discounted for accelerated receipt on that date. The parties and the experts appeared to take the view that, as long as proper account was taken of the uncertainties in determining the lost revenue stream, it did not matter much which route the court adopted.

The court’s inquiry is rendered difficult by the fact that no sales ever took place under the Agreement because of Nichols’ renunciatory conduct and Gul’s acceptance of it. Some projection of the kind made by Mr Sequeira has to be effected and Nichols’ approach and that of its expert was merely to challenge Mr Sequeira’s evidence without providing assistance to the court as to the true figures. Mr Wilkinson gave no opinion on what the proper figure for lost profits would be. The key question, as everyone agreed, was the extent of sales which Gul would have achieved over the life of the Agreement. There were differences between the experts about the expenses that would have been incurred and the discount rate to be applied, to which I shall come but the real focus of the argument was on the projected sales.

There were three sources of information considered by Mr Sequeira in coming to the views that he did and his extrapolation from the Navigant model. His first source was the result of a contemporaneous market survey conducted by Gul in 2011. The second source was the independent market survey conducted by Foresight Research for the very purpose of assessing the lost sales. The third consisted of a variety of independent third party sources about the cordial market in Pakistan, to which I have already referred earlier in this judgment.

The Gul market survey was conducted by Gul sales employees who contacted 33,803 retail stores that could be served by Gul’s distribution network. This included stores in Karachi, Lahore, Islamabad and Multan. The retailers were asked whether they would be interested in the Vimto brand and if so, whether they would prefer to sell DS Vimto cordial or SS Vimto cordial. Of the survey participants, approximately 60% expressed an interest in the Vimto brand and all of those preferred DS Cordial.

Mr Sequeira worked with Foresight to design the later questionnaire and the sample size for the survey which it carried out in 2013. The sample size was designed to provide a 95% confidence level with a 2.5% margin of error. As expressed by Mr Sequeira in his expert report, the purpose of the survey was two-fold. The first purpose related to retail stores that had sold DS Vimto cordial before (labelled for this purpose “Type 1 stores”). The survey gathered data on the historic sales volume and price, as well as other information such as the retailer’s expected sales of DS Cordial at the lower retail price that Gul expected to adopt. The second purpose related to stores which had not sold DS Cordial before (“Type 2 stores”) where the survey gathered data on the retailer’s interest in carrying DS Cordial at the lower retail price proposed.

Much criticism was made by Nichols of the “skewed” nature of the questions. The relevant questions read as follows:

how much Double Strength Vimto Syrup would you expect to sell (bottles per year)?

and do you think its sales will grow in future?

The survey, which took place in October/November 2013 in the three cities to which I have referred, was intended to provide information which could be used to assess future sales in urban areas where Gul considered that demand would be more concentrated. I summarise the result in the following paragraphs of this judgment.

In total, 2789 retail stores owners were interviewed by Foresight. There were four categories of retail stores within the survey sample, namely general stores, self-service stores, kiryana stores and bakeries, although, as I have already indicated, the category of self-service stores included some top end stores such as Naheed in Karachi, which was said to be a typical example of a store which catered for the wealthier elements in Pakistan.

42 of the 2789 retail store sample were Type 1 stores – i.e. those which had previously sold DS at cordial at prices between 310 and 350 rupees. All such stores expected to sell greater volumes of the product at the lower retail price proposed by Gul (220 rupees in year 1 but, since the survey was designed towards the end of year 2,240 rupees in the survey). The median sales volume of DS Cordial at the grey market price was 12 bottles per annum whilst the median expected sales volume at Gul’s proposed retail price was 70 bottles per annum.

Of the 2747 stores which had not previously sold DS Cordial (Type 2 stores) 2127 (76% of the sample) were interested in carrying DS Cordial at the lower retail price proposed by Gul. The most common reason advanced as to why they had not sold it before (a reason provided by 80% of the retail stores surveyed) was that the product had not previously been actively marketed to it.

The conclusion reached by Mr Sequeira was that the survey confirmed Gul’s contemporaneous survey in November 2011 and its belief that there was a strong untapped demand for DS Cordial in Pakistan.

Mr Sequeira calculated projected sales for Type 1 stores by estimating the number of stores in urban Pakistan that had previously sold Vimto based on the sample from the Foresight survey and then multiplied that figure by the median expected annual sales volume drawn from the survey from each retail store category. This gave rise to a figure of 67,897 bottles for Type 1 stores, a figure much less than the 120,000 bottles recorded by Aujan in 2006. The Navigant model assumed that the Type 1 stores sales would grow at the same annual rate as the cordial market forecast in the market literature – an annual growth rate of 5.8%. This resulted in projected sales of 112,778 bottles for Type 1 stores in year 10.

Mr Sequeira’s view was that this was a conservative estimate. I agree. To my mind it is self-evident that within a very short space of time, the whole of the grey market in DS Cordial would be captured by Gul, certainly by year 2, if not immediately in year 1 and that sales could be expected to grow at a greater rate than the cordial market as a whole.

Mr Sequeira then estimated the figure for projected sales for Type 2 stores by assuming that each Type 2 store would sell the same volume of product as a Type 1 store on the basis that Type 1 stores had a much better idea of the market into which they had sold than the Type 2 stores who had no experience of it at all. Mr Sequeira then discounted the figure thus produced by 90% for the first year and 80% for the second year to account for the fact that Type 2 stores were much less likely to achieve the same sales volumes as Type 1 stores. There was no logical basis for that reduction save that the 100% figure for Type 2 stores was so large as to be obviously unrealistic. Mr Sequeira’s assessment was that Type 2 stores would sell 2.4 million bottles after a 5 year period, with sales of 300,412 bottles in year 1, ramping up to 2.4 million bottles in year 6 (200,000 cases). The reason for pro-rating the figures across the years was the same as the reduction of 90% or 80%. For the following years (year 6 onwards) the model assumed that Type 2 store sales grew at the same annual rate as the broader cordial market, resulting in projected Type 2 store sales in year 10 of 2,993,914 bottles.

The Navigant model therefore projected Gul’s sales volumes increasing from 368,000 bottles in year 1 to 3.1 million bottles in year 10 which equated to a market share within the Pakistan cordial market of 2.7% in year 1 and 13.8% in year 10. Given the process by which 1 litre of the VX-80 concentrate purchased by Gul produced 80 litres of DS Cordial, the figures for each year meant that the minimum purchase quantities in clause 9.3 of the Agreement were exceeded by some distance.

The essential reasons why Mr Sequeira extrapolated the Type 1 store figures to Type 2 stores in the way that he did appear in paragraph 124 of his report which, he said, constituted a sense-check on the Type 2 store figures but which in practice must have effectively governed his selection of the 90% and 80% figures by which he reduced the transferred figures from Type 1 stores to Type 2 stores and the annual pro-rating. There he set out six considerations. The first was the minimum annual purchase requirements in clause 9.3 of the Agreement which started at 2,000 litres in year 1 and moved to 10,000 litres in year 5. If sales were effected with the purchased volume of 10,000 litres of concentrate in year 5, it would equate to a market share of 6.7%. Mr Sequeira suggested that the fact that this was a minimum purchase requirement indicated that both parties reasonably expected Gul to achieve higher sales volumes throughout the duration of the contract and the Navigant model projected a market share of 12.1% in year 5.

The second consideration of which Mr Sequeira specifically took account was the fact that the grey market figures for DS Cordial were not captured in the Euromonitor reports of market shares and that cordial consumption was therefore actually higher than their reports of it.

The third consideration was that in markets such as Saudi Arabia and the UAE (where Vimto had been produced and marketed and sold for a long period of time) DS Cordial had achieved a market share of over 40%. Annual sales exceeded 31 million bottles and sales were growing at a rate of 20% per annum.

The fourth consideration was that the middle class in Pakistan was enjoying growing levels of disposable income and increasingly aspired to replicate the lifestyle of consumers in Saudi Arabia and Dubai in particular. Whilst the GDP per capita of Pakistan was lower than that of Saudi Arabia and the UAE, its middle class was growing at a much faster rate. The 30-35 million figure in 2007, with further growth since, equated or exceeded the total population of both Saudi Arabia and the UAE.

Last, Mr Sequeira relied on sales data disclosed by Nichols for DS Cordial sold by its licensee Al Kaid in its licensed territory which included Yemen, Ethiopia, Eritrea, Djibouti and Somalia. Those countries were predominantly Muslim (similar to Pakistan) and the income level of the consumers in those countries was similar or lower than that of Pakistan. The population of all those countries was significantly less than that of Pakistan. He considered that the sales history of Al Kaid in the years 2011-2013, showing a growth from approximately 5.6 million to approximately 8 million to approximately 8.6 million bottles gave a reliable indication of the sales potential of DS Cordial in Pakistan.

Given Gul’s expertise and its business plan which included significant advertising and attractive commissions, Gul sales could be expected to blossom.

Nichols had a series of criticisms to make of Mr Sequeira’s approach, in particular in relation to the Foresight survey and the use made of it.

Nichols said that the questions posed in the questionnaire were patently skewed because the supposed advantages of DS Vimto were stressed. I do not consider this to be a valid criticism, save for question 17A. It was necessary for the participants to assess future sales on the basis of the price and commissions which were being offered by Gul, with the assurance of consistent supply and a strong marketing campaign.

Criticism was made of the extrapolation of results from such a low number of positive responses in the kiryana stores category and the bakery category (3 and 2 respectively) with the suggestion that one of those estimates of future sales was unreliable. Whilst, as Mr Sequeira accepted, such numbers were less than optimal, statistically, there was a 95% confidence level with a 2.5% margin of error for the General Stores and a 90% confidence level with a 5% margin of error for the remaining categories. There were no grounds for suspicion of the estimated sales of the store in question. Mr Wilkinson’s criticism was of the absolute size of the sample as opposed to the sample size relative to the overall population but the “absolute” figures upon which Mr Sequeira relied in the survey were reduced by excluding one kiryana store and one bakery as outliers because of high estimated sales. Mr Sequeira’s cautious approach thus had the effect of reducing the numbers.

It was suggested that the extrapolation exercise results in an unreal conclusion because kiryana stores and bakeries are seen as selling more bottles than the self-service stores which include the top-end retail stores. The reason that the self-service stores do not however give rise to the higher figure that might be expected from the top end stores is because the effect of the top-end stores is diluted by the other stores in the category. Bakeries might be expected to have high figures because they operate at the high end of the market, albeit that they are limited in number. The vast majority of the market (96%) is to be found in the general stores and kiryana stores.

The manner in which the survey was conducted means that the results are driven by the responses of store keepers who had sold very few bottles – the median number of actual bottles sold across the whole survey was 12. It was suggested that they would not be well placed to estimate how a change in price might affect their individual sales. In my judgment this too would only have had the effect of reducing the number of sales estimated. The top end stores, with much higher actual sales, which do show significant increases in the estimates of what they expected to sell, would, if used as a basis for extrapolation, give rise to higher figures.

There is no logical connection between the results of the survey for Type 1 stores and the assessment of future sales by Type 2 stores. I agree with this point as I have already indicated. The effect of reading across from Type 1 stores to Type 2 stores on a 100% basis would result in Type 2 stores capturing 67% of the Pakistani cordial market within a year, which could not conceivably occur. It was obviously for this reason that Mr Sequeira made the 80% reduction for year 2 and a pro-rata annual reduction from year 5 retrospectively.

In truth, Nichols suggested that the whole projection was based on the groundless assumption that Gul would achieve 13.83% market share by year 6.

On this basis, Nichols invited me to make a finding that Gul would not have made the volume of sales implied by the minimum purchase requirements for concentrates set out in clause 9.3 of the Agreement.

Such a contention is to my mind unsustainable. Both Mr Grainger and Mr Segar accepted that the minimum contract volumes were thought to be realistic. The fact that Gul did not achieve “stretch targets” set by Monarch in its licence arrangements and that Nichols’ previous licensees in Pakistan had, by reason of their own deficiencies, likewise failed to achieve targets set for them does not avail Nichols. Those targets all related to the carbonates market, not the cordial market and, by common consent, the carbonates market was a tough market to break into because of the dominance of premium international brands such as Pepsi Cola and Coca Cola which produced their own range of drinks, quite apart from the colas for which they are best known. After the sequence of failures with previous licensees, Nichols set what it considered to be realistic minimum targets for Gul, bearing in mind the cordial market for all of Pakistan where it had seen an opening for many years, as well as the carbonates market outside Karachi. Whilst it is true that Mehran failed to hit its targets under its 2011 licence agreement with Nichols (essentially for carbonates in Karachi) it appears from Mr Leghari’s evidence that Mehran, like previous licensees, had not set about a launch and marketing exercise in the best way. In my judgment, Gul was well-equipped to launch a new product into the cordial market, with its prior experience in selling fruity beverages in the carbonates market and a ready system of distributorship available involving the same distributors as used by Pepsi and Coca Cola, neither of whom was in competition in the cordial market.

Despite the cordial market being dominated by four brands, there was plainly an opening for a new product, particularly one with an international brand or of the nature of a premium brand. The points made by Gul about the existing knowledge in Pakistan of the brand and its association with Saudi Arabia, Dubai, pilgrimage and Ramadan constitute weighty factors in considering whether, when produced in Pakistan, good sales would have been achieved. I have no doubts at all that the grey market, significantly larger than 120,000 bottles in 2006, would have been captured virtually immediately because of the attractions of price, commission and regularity of supply. The constraints on the grey market would have disappeared. I suspect, though I have no way of knowing, that the minimum contract purchase requirements in the Agreement were set in the light of Nichols’ perception of the grey market. Nichols has given no disclosure which assists on this point, nor much in the way of disclosure on comparable product sales in other countries in the early years of distributorship.

There is some force in Nichols’ point that comparing Pakistan with the markets in the UAE, Saudi Arabia and Yemen is inappropriate because Vimto had been established in such areas for some time. The Aujan concession dated back 90 years and the Al Kaid concession 40 years. A valid comparison can however be made with Iran/Iraq in the light of evidence which emerged, in part, during the course of Mr Segar’s cross-examination.

Whilst there had been a grey market in Iran and Iraq, Aujan officially launched DS Cordial in Iran and Iraq in 2009/2010. The figures for sales achieved, expressed in cases, are as follows:

The total of Vimto cordial sold in Iraq and Iran in 2011 was 399,785 cases which amounts to 4,797,420 bottles or 3,406,168 litres. To produce this, 42,577 litres of concentrate would be required. Sales of cordial dropped in 2012 to 157,376 cases which amounts to 1,888,512 bottles or 1,340,844 litres. To produce this, 16,761 litres of concentrate would be required. In 2013 the sales increased to 243,075 cases which is the equivalent of 2,916,900 bottles or 2,070,999 litres. To produce this, 25,888 litres of concentrate would be required. Those figures in the first three years after launching the product exceed Mr Sequeira’s projection by a considerable distance.

The combined population of Iran and Iraq is in the region of 110 million which is lower than Pakistan whilst household spending on food and drink is comparable with it. Substantial sales have been achieved in this area in circumstances where Iraq has been through troubled times in the last five years in particular. Both Iran and Iraq are Muslim countries, sharing some cultural affinity with Pakistan. Whilst there was a drop in sales after the first year, the overall figures for the first three years after officially launching the product support Mr Sequeira’s conservative effort of 368,000 bottles in year 1 rising to 3.1 million in year 10. Whilst Aujan is a large organisation with years of experience in marketing, there was other significant competition in Iran at the time so that a useful comparison can be made with the position in Pakistan, bearing in mind Gul’s limited size but undoubted expertise in the drinks market and the lack of real competition for a premium product.

Moreover, it is clear from Al Kaid’s sales figure for DS Cordial that there was a substantial increase between 2011 and 2013 driven, according to Mr Segar, by new demand in Somalia which has a significantly smaller population than Pakistan and a significant history of conflict in recent years. Both Aujan and Al Kaid’s sales figures for DS Cordial show significant sales growth in the past 3-4 years and the Iran/Iraq figure came from a standing start in that country other than grey market imports.

Nichols focused on the position of Hamdard and its product Rooh Afza, as well as the other three major brands in the cordial market in Pakistan which make up some 76-78% market shares. The evidence does not suggest that these companies are in the same league as Pepsi and Coca Cola in terms of aggressive competition. They do not produce a premium product of any kind. The pricing level is altogether different from that at which Gul was proposing to launch Vimto DS Cordial. It is true that Rooh Afza has a traditional association with Ramadan, in the same way that Vimto DS Cordial does in Saudi Arabia and other parts of the Middle East, but the premium nature of the Vimto DS brand and its appeal to the middle classes is such that I see no barrier to Gul taking the market shares that Mr Sequeira calculates. Neither the 2.7% share in year one nor the 13.8% share in year ten impinge as such upon the market shares of the four brands. The primary target group for Gul’s DS Cordial campaign was to be the grey market which does not appear in the population to which the market shares refer at all. There is then the carbonates market which has international and premium brands of its own but the consumer has no comparable choice of international or premium brand in the liquid concentrates market. There is then both the 22% of the cordial market not covered by the four brands market share as well as the market shares of each of those brands in which Gul could be expected to have some success with a more upmarket product than Rooh Afza and similar drinks in what Mr Segar of Nichols described as “cheap PET bottles”.

Mr Segar’s view was that both the price of 260 rupees per glass bottle of DS Cordial and the minimum purchase quantities set out in the Agreement were realistic. With high incentives of a 40 rupees commission per bottle, the ability to produce and deliver the quantities estimated by Mr Sequeira and the distribution facilities available to it, I consider Gul is right in saying that it could achieve the sales figures that he advanced, even though there is no logical connection between his projected sales for type 2 stores as extrapolated on a 20% basis for the second year of operation from the type 1 store sales projections which I find to be cautiously conservative.

The focus of the parties was on the DS Cordial because the profits generated from it exceeded anything available in respect of the sales of carbonate at much lower prices in a highly competitive market. The effect of the calculations was that approximately 75% of the concentrate purchased would be used to produce DS Cordial and 25% was to be used to produce Vimto carbonate. The cash flow projections made by Mr Sequeira for carbonate were developed essentially in the same way as the projections for Vimto DS Cordial but the pre-tax cash flow ranged from 267,000 rupees in year 1 to 438,127,000 rupees in year 10.

In developing his projection of Gul’s Vimto carbonate sales, Mr Sequeira relied upon the Euromonitor report for the Pakistan carbonate market which indicated a 0.2% market share for Vimto carbonate in 2012. He assumed that, because Mehran was the only entity licensed to sell Vimto carbonate in Pakistan in 2012 and its territory was confined to Karachi, that 0.2% market share was attributable to Mehran. In those circumstances he considered it reasonable for Gul to achieve a market share of 0.1% in respect of the rest of Pakistan in the carbonates market (the consumption in Karachi amounting to somewhere between 40-60% of consumption in the country as a whole). The 0.1% share would grow to 0.6% by year 6 and would be maintained thereafter. The result was that Gul would sell 1.34 million bottles of Vimto carbonate in year 1 with sales increasing to 15.13 million bottles in year 10. The price for a 500 ml PET bottle in year 1 was to be 30 rupees (with a 2 rupee commission payable) with an increase in price in accordance with the rate of inflation.

Information disclosed by Nichols indicates that the actual sales volumes achieved by Mehran for Vimto carbonate in the Karachi area in 2012 amounted only to a 0.02% market share in the carbonate sector. In consequence, Mr Sequeira then considered that it would be more appropriate to assume that Gul would achieve a market share of 0.08% over the duration of the contract instead of 0.6% and adjusted his projection of Gul’s carbonate sales accordingly. With this calculation the sales volume of Vimto carbonate in year 10 of the contract dropped to 1 million litres, or 2 million bottles.

However the Euromonitor report of August 2013 expressly refers to the 0.2% market share for the years 2009-2012 as to Aujan’s sales of Vimto in Pakistan. There was therefore an existing market in carbonate for Gul to capture with local manufacture and lower pricing than Aujan would charge because of transportation costs. In these circumstances, I consider that Mr Sequeira’s original calculations, albeit conducted on the basis of false reasoning, are a better reflection of the sales which would have been achieved than his amended calculations on the basis of Mehran’s 0.02% market share. The effect of the original calculations, when applied to the existing situation is to assume that, in the first year, only half of the Aujan sales which presumably encompassed Karachi predominantly, but may have encompassed the whole country, would accrue to Gul in respect of sales outside Karachi. That too is probably a cautious and conservative conclusion.

In consequence, I accept Mr Sequeira’s calculations of projected sales of cordial and carbonates in their entirety.

There are three areas of dispute between the experts, namely administrative costs, sales and distribution costs, and advertising costs. Mr Wilkinson, in his report, assessed administrative costs and sales and distribution costs by reference to the revenues as opposed to the volumes of product manufactured and sold. As Mr Sequeira maintained, it is clear that each of the items concerned is inherently related to volume rather than revenue. Administrative costs do not increase simply because one product is more expensive than another and generates higher revenue. Sales costs are made up of production costs which are again volume related. The only cost which is not volume related is a provision for bad debts, which was the only example which Mr Wilkinson could put forward. Since Gul’s business was cash based, this would have no impact. Distribution costs are also volume related. It does not cost more to distribute an expensive bottle than a cheap one.

In cross-examination Mr Wilkinson said he had sympathy with Mr Sequeira’s views and he had no good reason, other than a mistrust of figures produced by Gul in its two sets of accounts for the approach he adopted. This does not justify his stance and I accept Mr Sequeira’s evidence in relation to these categories of costs.

So far as advertising costs are concerned, Mr Leghari’s evidence was that he was proposing to spend a total of 20 million rupees in advertising Vimto in the first year and thereafter the 5% of revenues required under the Agreement. With the low cost of advertising in Pakistan, that would result in substantial advertising, particularly since the premium price of DS Cordial would result in substantial revenues on the projected sales. It amounted to considerably more than the marketing rebate in Nichols’ licence agreement with Continental. I see no reason for considering that expense above and beyond that contemplated by Mr Leghari would be required and accept Mr Sequeira’s evidence on this point also.

Despite my misgivings, I am prepared to proceed on the basis of the methodology used by the two experts. Mr Sequeira calculated a discount rate of 15.65% whereas Mr Wilkinson adopted a rate of 33% to the future cash flows associated with the sales of Vimto products.

The discount rate that is used to discount the cash flows of a company or project is commonly referred to as the Weighted Average Cost of Capital (WACC). This represents the weighted average of the cost of equity and the cost of debt that is used to fund the company or project. The most widely utilised method for estimating the cost of equity is the CAPM, the formula for which includes an element called Beta which represents the systematic risk or volatility associated with a particular security, relative to the market as a whole. A Beta of 1 indicates that a securities price will move with the market whilst a Beta greater than that indicates it is more volatile than the market and a Beta of less than 1 indicates that it is less volatile than the overall market. In general, it is accepted that the main controlling factor in assessing the Beta is the risk associated with the sector in which the company operates, although the company’s own position within that sector obviously has impact.

Mr Sequeira included a factor of 0.44 for Beta whereas Mr Wilkinson considered that it should be 1 or above. The debate between the two related to the concurrent debate between them about whether or not it was right to apply a small company risk premium and a Gul-specific risk premium, which Mr Wilkinson had done to the tune of 11.65% and 5% respectively.

Mr Sequeira looked at the Betas for 79 listed companies within the global soft drinks market. Beta is, he said, basically an indicator of systematic risk specific to a certain sector – how stocks vary relative to the market. Mr Wilkinson said that a rate of 0.44 made no sense when compared with Coca Cola which was rated at 0.3-0.54, depending on whether the Bloomberg figure or Professor Damodaran’s figures were taken. Gul’s Beta should not be anywhere near that of Coca Cola and it should be more than 1 because it is more volatile than the whole of the market in the whole of the world. A small private company’s Beta should be very different from that of a large international public company like Coca Cola. Coca Cola’s own bottling company itself had a Beta of 0.41 but it too was not a small private company like Gul. He accepted that the main driver of Beta was the market sector but rejected the figures for Shezan and Clover which were small listed companies with Betas of 0.1 and 0.4 because he considered the figures unreliable as their shares were not traded regularly. It was not simply a matter of the sector.

Additionally, Mr Wilkinson said that a size premium should be added because Gul was a small company. He referred to the Ibbotson SPBI Valuation Yearbook which divided companies into ten deciles, with a tenth decile representing the smallest companies. That decile was divided into four categories of which category Z was the smallest, with a market capitalisation range of $1.1 million to $96.2 million. He therefore allocated a size premium of 11.65% to Gul.

As Mr Sequeira pointed out, Ibbotson’s data was based on US market perspectives and what was considered a small company there. A small company in Pakistan is very different from a small company in the United States or the United Kingdom. Gul would not be considered a small company in Pakistan and all the companies listed on the Pakistan stock exchange had a WACC of 12-17%. 15.65% was well within the range for companies of capital of £100,000-£1 million. There was no need for any additional small company discount at all.

When he gave evidence, in cross-examination, Mr Wilkinson moved away from basing his 11.65% discount upon Gul’s size to stating that it was justified because Gul was an unlisted company, a matter to which no reference was made in his report. He accepted that the Bloomberg data for all companies listed on the Karachi stock exchange, including several with capitalisation and revenues below those of Gul showed that there was no additional premium applied in Pakistan to the cost of capital for smaller companies. There was not a single company listed with a WACC above 20%.

Mr Wilkinson also added a further 5% premium to the discount rate to reflect what he considered to be the specific risks of Gul as a result of the lack of transparency in its accounts. He considered this entirely reasonable without being able to advance any further justification for it.

The very nature of these disputes shows the limitations of the CAPM method when applied to the present case because it seeks to evaluate various company related risks rather than looking at the net revenue stream which would, on the balance of probabilities, have been realised. Accepting the method as a proxy however, I can find no basis for adding a small company discount of 11.65% nor a Gul-specific risk premium of 5% on top of Mr Sequeira’s 15.65%. Nor can I see any basis for interfering with Mr Sequeira’s Beta factor of 0.44%, regardless of any comparison with Coca Cola. As I have found that Gul was perfectly capable of producing the Vimto cordial and carbonate and distributing it over the life of the contract, that it was a well run business, albeit with a false set of accounts for the taxman, there is no need for an additional factor to take account of the risk of investment in the company over and above that which applies to the sector in which it operated.

As Mr Sequeira pointed out, the only real risk in the project was the uncertainty of scaling up the DS Cordial business from the grey market to the projected sales which he calculated. The project was not a “start up” project because of the grey market and the fact that the product was known. It was not a new concept that was being brought to the market place. There was no risk in production of the Vimto cordial or carbonate and no risk that the project would not get off the ground because the grey market would be captured as a bare minimum. In those circumstances, applying the WACC which included the risk-free rate of return, the Beta, the equity market risk premium and the country risk premium, the elements which could affect the likelihood of obtaining the revenue stream were built into his discount rate of 15.65%. Company and product specific risks were incorporated into the cash flows. The effect of Mr Wilkinson’s additions, arriving at a rate of 33%, was to treat this as “venture capital”, though he referred to it, not as a total start up but as an expansion to the type of business previously conducted by Gul in a market of which it knew nothing. I see no justification for that approach in the light of my findings and the one uncertainty with which I have had truly to grapple, namely the risk that future sales would not develop as predicted.

Mr George for Nichols, in reliance upon paragraph 24-023 to 24-028 of Chitty on Contracts (31st Edition) and dicta in Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827, submitted that where there was a renunciation of a contract which constituted an anticipatory breach, no damages could be claimed by the innocent party in respect of the period prior to his acceptance of that renunciation as bringing the contract to an end. I do not accept that submission. In Johnstone v Milling (1886) 16 QBD 460, the effect of an anticipatory breach was set out by Lord Esher M.R. when he stated that a renunciation could be acted upon by the innocent party in such a way as to declare that he too treated the contract as at an end “except for the purpose of bringing an action upon it for the damages sustained by him in consequence of such a renunciation”. Until the renunciation is accepted, the contract remains in being with duties on both parties to perform but once accepted, the contract is brought to an end and the innocent party can sue for all damages which flow from the refusal of the defendant to perform all his obligations under the contract. The cause of action is the renunciation of the contract and the refusal to perform the contract with all the obligations which fell to be performed thereafter. The innocent party can then sue for all damages resulting from that refusal and not simply for those which relate to the time after he accepted the renunciation as bringing the contract to an end.

The Agreement was dated 28th September 2011. But for Nichols’ renunciation, the DS Cordial and carbonate products would have been launched in early March 2012 with the result that the first year under the Agreement would effectively only have been 7 months. This 7 month period however, on the evidence before me, included the critical 2 months leading up to Ramadan which began on July 18th 2012 and the month of Ramadan itself during which some 80% of cordial sales appear historically to have taken place. It also included the whole of the summer season during which an equivalent percentage of carbonate sales occur. Given the existence of the grey market in each of these two segments of the soft drinks industry and the effect of a concerted launch, I consider that there is no need to make any discount from the predicted figures for the first year because sales would only take place in 7 months of it.

Nor do I consider, given the conservative nature of Mr Sequeira’s predictions, that there is any need for any adjustment to his figures in respect of the date of receipt of monies (which is relevant to the calculation for accelerated receipt and interest). He worked on the basis of receipt at the half year rather than receipt at the end of the year although, in reality, the vast majority of receipts would have taken place somewhere between the two. I shall be doing no injustice to Nichols by proceeding on the basis of Mr Sequeira’s calculations.

The figures put forward by Mr Sequeira in his original report of 14th March were amended by him in a report dated 4th June 2014 to take account of various errors that had been pointed out to him by Mr Wilkinson in the joint meeting of experts ordered by the court. Schedule 2 to that report sets out the updated figures, taking account of interest at the rate of which Gul could have borrowed funds in respect of sums which should already have been received by June 4th 2014. It also discounts sums which would not have been earned until later for their accelerated receipt as at that date. I do not understand that calculation to be the subject of any dispute if the underlying basis of it is accepted. I have accepted that basis in its entirety and subject to any desire to update the figures to the date of judgment, I find that the sum to be awarded by way of damages to Gul is the sum of PKR 1,359,978,570. As Gul would feel the loss in Pakistan in rupees, that must be the currency in which damages should be awarded, in the absence of any evidence to the contrary. Again, subject to submissions to the contrary, interest at the judgment rate will run on that sum from the judgment date.

Costs must also follow the event, subject to any special considerations of which I am not currently aware.

I trust that the parties will be able to agree the form of order which follows from this judgment but if not, I will rule upon it after hearing the parties’ submissions. The order will provide both for the rectification of the Agreement and for damages for breach of contract as well as costs.

It remains only for me to thank counsel for their assistance and for the manner in which they presented their arguments. Although there was an under-estimate of the time required each presented his case effectively with skill and economic use of time.