PJ Pipe & Valve Co. Ltd. v Audco India Ltd.

Dramatis personae

Introduction (paragraphs 1 – 3)

The areas of dispute (paragraphs 4 – 6)

The valves (paragraph 7)

The use of agents (paragraphs 8 - 14)

Commission levels (paragraphs 15 – 17)

Types of contract (paragraphs 18 – 21)

The witnesses (paragraph 22)

The Shell Malampaya Onshore Gas Plant, the Philippines (paragraphs 23 – 24)

The Aramco Berri Gas Plant, Saudi Arabia (paragraph 25)

The Aramco Berri Gas Plant (additional requirement) (paragraphs 26 – 32)

The General Exclusive Agency Agreement (paragraphs 33 – 37)

The Bonny Island Project, Nigeria, phases 4 & 5 (paragraphs 38 – 48)

The Bonny Island Project, Nigeria, phase 6 (paragraphs 49 – 56)

The Nanhai Project (paragraphs 57 – 99)

The Damietta Project (paragraph 100)

Disclosure (paragraph 101)

The PJV Bonus Scheme (paragraph 102)

General matters (paragraph 103)

Commission rates for agents and the Bonny Island Project, Nigeria, phases 4 & 5 (paragraphs 104 – 112)

The Bonny Island Project, Nigeria, phase 6 (paragraphs 113 – 120)

The Nanhai Project (paragraphs 121 – 139)

Was PJV a commercial agent and how should compensation under the Regulations be calculated? (paragraphs 140 – 173)

Summary of conclusions (paragraphs 174 – 175)

The claimant in this case, PJ Pipe and Valve Co Limited (“PJV”), is an agency in the petrochemicals industry, having been founded in 1976 in order to promote and sell products – particularly valves – within that industry. Audco India Limited (“AIL”), the defendant, is a company based in India which manufactures valves, and in particular some which are used during the construction of petrochemical process plants. Both parties are experienced and competent in their respective fields. AIL is owned by both Larsen and Toubro Limited, India (one of the largest engineering groups in India) and the Flowserve Corporation (USA). PJV is a well-established agent, having traded for some 28 years and its employees have considerable experience of the supply of process valves.

In circumstances that are explained in detail hereafter, the claimant was retained by the defendant as an agent, and this judgment follows the trial of the claim by PJV against AIL for damages and commission under two agency agreements. First, an Agency Agreement made on 6 or 7 December 2001 relating to products to be supplied to a petro-chemical complex in Nanhai (the “Nanhai Agreement”). Second, a General Exclusive Agency Agreement made on or about 4 February 2002, under which PJV was given exclusive rights to represent six named UK contractors for a period of two years expiring on 31 December 2003. In September/October 2002 AIL acted in repudiatory breach of the General Exclusive Agency Agreement by indicating its intention to employ an alternative UK agent and by purporting to terminate the agreement in October 2002. On 17 December 2002 PJV by letter accepted that repudiatory breach.

The evidence has focussed, albeit unevenly, on a number of construction projects, and in particular:

The Shell Malampaya Gas Project, the Philippines (the engineering contractor was Foster Wheeler);

The Aramco Berri Gas Plant, Saudi Arabia (the engineering contractor was AMEC);

The Aramco Berri Gas Plant(additional requirement);

The Bonny Island Project, Nigeria, phases, 4, 5 and 6 (the engineering contractor was MW Kellogg);

The Nanhai Project, China (the project-engineering contractor (“PMC”) was Foster Wheeler;

The Damietta Project, Egypt (the engineering contractor was MW Kellogg).

The claim in respect of the Nanhai Agreement (which remains in force) is for commission due in respect of orders placed on AIL for the project in Nanhai. The claim in respect of the General Exclusive Agency Agreement is for reasonable commission or damages due in respect of orders placed on AIL for the Bonny Island project, Nigeria, Phases 4 and 5; for commission or damages in respect of orders placed on AIL for the Bonny Island Project, Nigeria, Phase 6; and for compensation under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993.

The issues in this case changed substantially during the period leading up to the trial and, to an extent, during the hearing; in consequence, the pleadings, as well as the skeleton arguments submitted prior to trial, did not accurately reflect the final respective cases of either the claimant or the defendant. In particular, certain matters ceased being in dispute during the trial, and, at my invitation, both sides reformulated their respective cases in separate written documents after the close of the evidence and before the commencement of final submissions.

In the result, the issues to be resolved are to be understood by reference to parties’ closing submissions. It is agreed that the following matters fall for determination in this case:

the appropriate rate of commission for Bonny Island phases 4 and 5; the rival contentions are: 5% (the claimant’s case) or 3.5% (the defendant’s case); (Footnote: ¹)

the extent to which, if at all, PJV is entitled to commission or damages on Bonny Island phase 6 (both sides agree that this should be at the same rate as for phases 4 and 5); (Footnote: ²)

whether PJV was a commercial agent within the meaning of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (Footnote: ³) and the amount of any compensation; and

the scope of the Nanhai agreement (it having been agreed that PJV is entitled to commission of 3% on the value of the relevant orders). (Footnote: ⁴)

In this action the court has been concerned with three valves that are used in large numbers in the construction of process plants: gate, globe and check valves. These particular valves include:

stainless steel valves;

alloy valves;

cast steel valves;

low-temperature carbon steel valves; and

stainless steel cryogenic valves.

The use of agents by valve manufacturers is common in this specialised industry, particularly because there is an active market for the valves that all process plants need, and in consequence there are a considerable number of competing suppliers. Manufacturers need to be apprised of relevant commercial opportunities, and to have their products brought to the attention of, and promoted to, engineering contractors. In outline, the usual course of events for a project is that an approved vendor list is drawn up; invitations to tender are then issued to those manufacturers on the list (these are referred to in the industry as “enquiries”); and thereafter orders are placed with the manufacturer whose bid has been accepted. Significantly, in the context of this action, commission is only paid to the agent in the event of success in obtaining an order.

Rigorous standards must be met by suppliers in this industry before they are designated as an approved vendor, and although there are a variety of technical standards that have been established, those promulgated by Shell (the “Shell standards”) have gained a certain pre-eminence and they are widely used.

Focussing on the role of the agent in slightly more detail, it is agreed that agents in this industry perform, inter alia, the following functions on behalf of the manufacturers:

They promote the capabilities and reputation of their principal (the manufacturer) to engineering contractors generally;

They put forward the principal as a suitable candidate for supplying valves in relation to particular projects, in order to ensure that the principal is designated as an approved vendor – the essential prerequisite for an invitation to tender for the project;

They advise the principal as to both current and future opportunities, so that a decision can be made as to which projects the principal wishes to pursue;

They advise the principal to the extent required on the preparation of quotations;

They deal with any queries which arise in respect of quotations in liaison with the principal; and

So far as possible, they provide feedback on how the quotation has been received, and whether any steps can be taken to improve its chances of being accepted.

Usually valve-manufacturing principals only appoint one agent (viz. an exclusive agent) to cover a specific customer or customers, or industries, or projects, or a geographical area. However, the events of this case reveal at least two instances of departures from that norm which have been analysed below.

Critically, it is common ground between the parties that an agent does not negotiate or agree either prices or commercial terms with the engineering contractor on behalf of its principal. The reason for this has been explained in an uncontentious way by the Chairman of PJV, Mr Peter Munro:

Mr Saville (the single joint expert) expressed his agreement with this view as follows:

After a tender has been accepted and the order has been placed, the contractor normally deals directly with the manufacturer as regards such matters as expediting delivery of the valves or any technical queries that may arise in the normal course of events. Occasionally the contractor will require the agent to act as an intermediary in order to provide a contact point for the manufacturer at their UK offices. Generally, the agent would only be used by the contractor in the unlikely event that the manufacturer’s performance was so below par that they were needed to apply additional pressure to secure timely delivery of the goods ordered. It follows that the pre-enquiry and pre-order activities of the agent constitute overwhelmingly the greatest part of their work.

The general position of the parties as regards commission levels is that for the claimant it is asserted PJV operates on the “usual” basis of 5% (which can be varied depending on particular factors) but routinely 5% was the level of their commission unless another rate was agreed. On this issue of what he described as the “standard commission rate” in the industry, Mr Peter Munro set out his understanding thus:

Mr Dev (who at the relevant time was the sales manager of “end products” on the international markets for the defendant) suggested, to the contrary, there is no standard commission in the industry or any such understanding or arrangement with PJV, and he maintained that the amount of commission depended on the individual circumstances of each order. Therefore, he did not accept there was an underlying agreement that 5% was the commission level unless varied or that 5% was the rule of thumb for commission levels, and he additionally rejected Mr Saville’s evidence that there was a sliding scale, with the commission level reducing as the overall value of the order increases, within the band of 2% - 10%. Mr Dev’s account was that the commission rate depended on such factors as: order value; any discounts which AIL made to secure the business; commission payable to local agents; and the agent’s role and effort in securing the business. He suggested that on occasion all that was agreed initially was a minimum figure which was to be the subject of later negotiations as the bid came closer.

Mr Saville’s opinion on reasonable commission levels within the industry were as follows:

On orders up to £200,000 commission will notionally be 7.5% - 10%.

Thereafter, orders up to £500,000 will routinely be indented with a 5% commission.

Orders up to £2,000,000 will also generally attract a notional 5% commission, although commercial factors (the risk of being uncompetitive) may require a reduction in this level to 4% or even 3.5%.

With orders above £2,000,000, the supplier will (for competitive reasons) limit commissions to slightly lower levels, and orders of £2.25 million and £3.75 million (which feature in this case) would normally attract a commission of 3% to 4%.

Orders over the £5 million level are invariably highly contested and will generally attract commissions of 3% as an absolute maximum (usually driven down to 2.5%), dropping to as low as 2% for really big orders in excess of £10 million. (Footnote: ⁸)

Process plants are usually built by a sole international engineering contractor or a consortium, but in either case under what is known as an “EPC contract” (“Engineer, Procure and Construct”). Contractors tend to work across global markets with operating companies in a number of different locations; they undertake the detailed engineering of the plant, procurement of all the equipment and services required to build it, as well as the physical construction and commissioning of the plant; and during the course of any one project hundreds of orders will be placed on sub-suppliers of equipment. The overall costs for each plant will often reach hundreds of millions of pounds.

Usually at least two other kinds of contract come into existence for the building of a plant. The first in order of time is the “FEED” contract (“Front End Engineering Design”) which is placed on a contractor to complete a basic design of the plant and, frequently, to provide a budget for the final price. Important decisions may be reflected in these contracts on issues such as the specification and type of equipment to be used, and at this stage a list of potential suppliers of key items may be drawn up.

Secondly, often there will be a “PMC” contract (“Project Management Consultancy”), the function of which is to support the company promoting the project with design and project management services, but not carrying responsibility for the physical construction of the plant.

The engineering contractor in charge of a project will usually have direct responsibility for placing orders on manufacturers for valves, although on occasion, and particularly when the project will entail many contractors working on different parts of it, the contractor can be required to prepare “MFPA” agreements (“Multi Facility Purchase Agreements”), otherwise known as a Framework or “Frame” Agreement, for some or all of the equipment required, which bind the final winners of the EPC contracts. In the result, an EPC contractor is compelled to procure the specified equipment with a particular named supplier on pre-agreed terms. The commercial and safety advantages of such an arrangement are self-evident. The Frame Agreement is not itself an order, but it will be used by individual contractors when placing orders for valves on the Frame Agreement holder. In this case an issue between the parties is the extent to which contractors may seek, successfully or otherwise, to avoid the Frame Agreement. The subject of Frame Agreements is dealt with in greater detail hereafter in the context of the Nanhai Project at [62] – [65].

I found the Munros, father and son, together with the other employees of PJV, to be impressive witnesses; their evidence was balanced and moderate; and there were no indications in either their written or oral evidence that at any stage they became inaccurate or unreliable in an attempt to improve PJV’s case, although I found the evidence of the Messrs Munro on both commission levels and the scope of the Nanhai agreement somewhat unrealistic. In contrast, on certain key issues I found the evidence called by the defendant less reliable. On a number of topics of importance, referred to in detail hereafter, I found the account of Mr Dev irreconcilable with other evidence, and in particular the contemporaneous records. For instance, in his written evidence, he attempted to create an incorrect impression by undermining in certain key instances the contribution made by PJV as an agent – these criticisms were often inconsistent with the letters/emails of thanks and congratulations sent to PJV at the time. Furthermore, there was a significant change between Mr Dev’s written and oral evidence in this regard. Mr Bannerjee I found to be hesitant on certain critical issues, but essentially I considered he was candid in his evidence. As Mr Nash pointed out, generally he agreed with the claimant’s witnesses on many, if not all, of the important issues in dispute. Accordingly, it is my conclusion the claimant’s witnesses have provided the court with an accurate account, and insofar as there are areas of evidential dispute, uncertainty or ambiguity, generally (although not in every instance) their evidence is to be preferred and accepted.

On 24 January 2000, Steven Charles (the Commercial Director of PJV) sent a facsimile to Ashok Bannerjee (the then General Manager of AIL) inviting his company to become involved in the construction of this project, particularly given that it had been decided that only valves from Shell approved sources could be utilised on the plant. AIL was such a source, and they put in a bid to supply valves that included 5% commission for PJV on the total contract value. The bid (worth approximately $494,000) was accepted, and on 7 March 2000 Mr Bannerjee sent Mr Charles his congratulations on PJV’s success in securing the Shell Philippines contract: “Hearty congratulations on your success in securing the business for AIL valves for Shell Philippines Exploration project from Foster Wheeler Energy Ltd UK and best wishes for your continued success in promoting AIL business with the engineering houses in the UK in future” (Footnote: ⁹). It follows that PJV were responsible for introducing AIL to the project. As Mr Charles has described, Foster Wheeler are one of PJV’s biggest clients, and over the years they have been involved in some successful contracts with them. It is accepted that the prestige of the Malampaya contract was substantial, and securing this order would have been of considerable potential future benefit for both AIL and PJV.

Mr Dev stressed in his written evidence that all correspondence on technical and commercial matters, and the details of the contract, involved direct communications between Foster Wheeler and AIL, and, in my view, he has thereby sought to play down the role of PJV.

AMEC, the contractor for this plant, has been a regular and good customer of PJV. PJV contacted AIL as regards this project, and they submitted a tender for AIL for an order worth over US$1 million in the autumn of 2000 to supply valves to AMEC that included 5% agent’s commission for PJV. Although AMEC had no previous dealings with AIL and limited knowledge of their products, they were put on the shortlist of two bidders and they were called for a final meeting with AMEC on 5 November 2000; however, they were bidding against a rival manufacturer (Orion), who quoted through a rival agent, HS Pipequipment (HSP), and, in the event, Orion were awarded the contract.

On 11 December 2000, Mr Dev wrote to Mr Petrie, the Senior Buyer for capital projects at AMEC, offering to “extend their support and assist(ance)” as regards supplies of cast valves, should the need arise. Such an event did arise in September 2001 when the Berri project had a last-minute requirement for valves, and AMEC issued an invitation to tender addressed to PJV because Orion was potentially unable to give delivery within the time-frame stipulated by AMEC. PJV received AIL’s quotation on 19 September 2001 which confirmed price, delivery, technical details and their 5% commission. However, AIL were unable to quote against two items relating to 14” and 16” valves which were outside their product range. As a result, AIL asked PJV to become involved in outsourcing those items, and a company called Petrolvalves was approached. During these negotiations Mr Dev sent Mr Steven Charles an email on 25 September 2001which concluded “Steven, we have put in our best offer for this requirement. I hope we would have an opportunity to work together again on a major project requirement with this one”. (Footnote: ¹⁰) Following a significant amount of discussion, and including on the issues of pricing and the technical requirements, on 5 October 2001, PJV submitted a (revised) offer for this additional requirement on behalf of AIL, which they expected – seemingly on wholly sustainable grounds – would be accepted. As Mr Peter Munro has explained, the offer was considered by Amec to be commercially and technically acceptable and PJV were advised that they could expect an order.

However, during this period, Mr Dev informed Mr Charles that HSP (HS Pipequipment (Footnote: ¹¹)) in the person of Mr Hunt had approached AIL requesting that they provide an offer to them for the additional valves, and that AIL had been persuaded that it was in their best interests to bid via HSP as well as PJV. Mr Charles strongly advised AIL not to take this step. However, on 12 October 2001 Mr Dev sent an email to Mr Charles indicating that HSP had placed the order with AIL for “all valves in sizes 3” to 12”. The email went on “I would like to thank you for the efforts made to get AIL in. To get the full requirement would have been very good. But given the clout of HS Pipe having secured the first two orders – they were apparently inclined to give this also to him”. (Footnote: ¹²)

In the result, with the final assistance of HSP rather than PJV, AIL were awarded 3 orders for valves, on which they paid PJV commission at the rate of 2%, as opposed to rate that had been agreed of 5%. Mr Dev described this as a gesture of goodwill.

No claim arises out of the events concerning the Berri Gas Plant (additional requirement); however, they form part of the relevant background to PJV’s claim, and given they have materiality in that sense, my analysis is as follows. The history revealed by the documents supports the detail of the claimant’s case and evidence in relation to this project. In particular, the exchange of emails between Arun Dev and Chris Rosser (the Marketing Director of PJV) on the 2and 4 October 2001 demonstrate that there are strong reasons to conclude that AIL under the PJV agency would have been awarded the contract (Paul Crean the project buyer with AMEC “…said he expected to place work with us. ‘It was for us to lose’”: Mr Rosser to Mr Dev 2 October 2001)). (Footnote: ¹³) Notwithstanding that apparent proximity to success, simultaneously on 4 October 2001 Mr Taylor of HSP approached Mr Dev by email asking him to quote his best price for cast carbon and cast stainless steel gate, globe and check valves, to which Mr Dev replied supplying the information on the same day. I am satisfied that by 5 October 2001 (at the latest), HSP were making arrangements with AIL for an order to be placed on them by AMEC for valves. (Footnote: ¹⁴) AIL clearly understood that HSP acted for them in the role of agent as is demonstrated in the email of 12 October 2001 from Mr Dev to Mr Charles:

The minute of a meeting at AMEC Crawley on 17 October 2001, together with the note of the telephone call on the following day between Mr Laurie of AMEC and Mr Peter Munro, reveal that an employee of AMEC had provided crucial information to HSP. Whether this unwarranted disclosure was because of a simple mistake or the result of something more reprehensible is not of any particular moment as regards the decisions that fall to be made in this case. However, as Mr Saville, the joint expert, has described, what is of significance is that disclosure of information in circumstances such as these constitutes unethical behaviour under the normal conventions of this industry. Furthermore, the course of events I have just described unsurprisingly caused PJV great concern, not least because AIL paid commission to PJV at the rate of 2% rather than 5%.

By way of summary, therefore, I have no doubt on all the evidence that in early October 2001 HSP indicated to AIL that they had become aware of the terms of the confidential bid that had been made by AIL through PJV for this part of the Berri Project. It is clear that following a direct approach by HSP and on account of the latter’s suggested special relationship with the client, they were used as agents by AIL to secure the contract for the additional valves.

As regards the approach taken by PJV following these unsatisfactory events surrounding the Aramco Berri Gas Plant, I accept the evidence of Mr Daniel Munro when he said that he took “defensive action” to protect PJV so as to ensure they benefited (financially) from their future marketing efforts; in other words, PJV wanted to prevent this kind of situation recurring. (Footnote: ¹⁶) This was PJV’s first experience of an agency being transferred in this way: when the existing agent was on the point of obtaining an order on behalf of a principal.

Following what for PJV had been an unsatisfactory outcome of the Aramco Berri Gas Plant (additional requirement) order, negotiations for a general exclusive agency agreement began in November 2001, which was finalised on or about 4 February 2002 and under which PJV was given exclusive rights to represent AIL to six named UK contractors (AMEC, AKER, Foster Wheeler, MW Kellogg, Stone and Webster and Kvaerner) for a period of two years expiring on 31 December 2003. This agreement applied only to the cast steel gate, globe and check valves manufactured by AIL, and in relation to both those valves and the specified companies, AIL agreed not to quote to other agencies in the UK. Otherwise, it is accepted between the parties that the terms of that agreement are set out in an email of 4 February 2002 from Mr Dev to Mr Daniel Munro although no reference was made to the agency rate that would apply and accordingly no overt agreement was reached as regards commission. (Footnote: ¹⁷)

As Mr Daniel Munro observed in his evidence, PJV’s marketing efforts for an Indian product would need to be extensive given a lingering suspicion in the UK – which, on the evidence, certainly as regards AIL was unfounded – that Indian manufactured valves were of low quality. As Mr Peter Munro set out in his evidence, Mr Cees Glansdorp of Shell gave AIL a strong endorsement.

Mr Peter Munro described the main examples of the advantages that accrued to the defendant following the work his company undertook on behalf of AIL during the agency. This has not been the subject of detailed or sustained dispute, although as I have already indicated Mr Dev, particularly in his written evidence, called into question whether PJV either worked effectively on their behalf or produced significant benefits for AIL. The evidence on this subject, in my judgment, clearly demonstrates that PJV not only acted professionally on behalf of AIL, but they also achieved notable results; some of the main examples have been described elsewhere in this judgment, but I should add Mr Peter Munro’s evidence, which I found wholly persuasive:

Mr Daniel Munro has explained the failure to discuss or reach an agency rate within the context of this general exclusive agency agreement as follows:

As set out above, the defendant does not accept there is any industry-wide standard rate.

This was a very large project for the construction of a complex to produce liquefied natural gas and the contract to supply valves was dealt with by a consortium that included MW Kellogg (one of the contractors covered by the General Exclusive Agency Agreement). The project had been running for several years, and at the time of AIL’s involvement was in the later phases of development. Although there is dispute as to whether PJV alerted AIL to the existence of the project, PJV prepared the ground for the inclusion of AIL on the vendors list: AIL were introduced to key project personnel, and PJV supplied information on AIL to MW Kellogg staff, who were unaware of AIL’s products. There is an extensive corpus of email traffic which bears out the endeavours of PJV over the relevant period. The value of this work was contemporaneously recognised by Mr Dev when he sent an email to Mr Daniel Munro on 19 September 2002 which included the following “We recognize the role played by PJ Valves in introducing AIL to MWK. In the event of AIL being considered as a successful bidder for this project, we would provide a commission to yourselves.” In particular, it had been necessary to overcome MW Kellogg’s suspicions of Indian products, a subject touched on at [34] above. One of the material events that led to the inclusion of AIL on MW Kellogg’s vendor list for this project was a joint PJV/AIL presentation on 8 or 9 April 2002 that included a key Shell representative (Jan Taal). Thereafter in late May 2002, AIL received the main valve requirement enquiry for phases 4 and 5 and PJV maintained contact with the project so as to ensure that the bid process was as effective as possible; moreover, they dealt with some important enquiries. AIL sent the sealed bid documents for the project direct to the Bonny Island project company. As Mr Dan Munro understood the position, AIL were then included on the relevant shortlist. (Footnote: ²⁰)

As a result of separate negotiations, AIL were awarded an order via PJV from MW Kellogg on 22 August 2002 for an amount of 8” valves for phases 2 and 3 of the Bonny Island Project. These were supplied successfully to the project; this event importantly reflected MW Kellogg’s acceptance of AIL’s products for this project.

Notwithstanding that event, on 17 September 2002, following a meeting at MW Kellogg that had included Mr Daniel Munro and Mr Rosser, Mr Dev informed Mr Rosser that AIL had discussed quoting the Bonny Project valve requirement to HSP (who simultaneously represented a competitor company, Orion) because he had been told by Mr Draper of HSP that MW Kellogg preferred to work through HSP. Mr Dev said that HSP had provided AIL with confidential (and good) information on their bid which made the latter conclude HSP had the ability to obtain confidential information from MW Kellogg.

Mr Daniel Munro took immediate action to establish what was happening, and to ensure, if at all possible, that AIL did not break the agency agreement. I accept Mr Munro’s evidence that PJV understood from the project procurement personnel that AIL were well positioned to win the purchase order having gone through months of technical and commercial clarification, in which process they were substantially supported by PJV.

AIL communicated and described their decision in the email of 19 September 2002 (see [38] above) from Mr Dev to Mr Daniel Munro:

Thereafter, in an email dated 24 September 2002 to Mr Daniel Munro, Mr Dev set out in terms that “… H S Pipequipment Ltd, UK would be AIL agents for all AIL offers made to MW Kellogg”. (I interpolate to note that clear statement materially contradicts later suggestions by AIL that HSP had acted merely as consultants/advisers. (Footnote: ²¹)) Notwithstanding that action, on the same day Mr Bannerjee sent another email in which he stated “Do not take the MW Kellogg situation personally – please. You continue to be our prime partners in UK. Our exposure with PJ Valves has been more than with any other company we are dealing with in UK”. The implied suggestion contained within the latter email that PJV were not being criticised is to be contrasted with an email dated 26 September 2002 in which Mr Dev questioned the extent to which PJV had contributed to the progress that AIL had made with the Bonny Island bid, and in particular as to the receipt by AIL of the enquiry and their later inclusion in the vendor list. The following notable matters were stressed by Mr Dev: first, inclusion on the vendor list only came after a meeting with various representatives at the offices of MW Kellogg; second, the enquiry was received direct from MW Kellogg; and third, AIL’s Shell approval was a critical factor. In the premises, Mr Dev suggested it was wrong for PJV “to insist” that they only obtained the enquiry for AIL, together with inclusion on the vendor list. Indeed, in his witness statement, Mr Dev has suggested that “Other than arranging appointments with MW Kellogg technical personnel, which were subsequently cancelled, and acting as a “post box”, PJV had no other involvement in the AIL tender for the project.” (Footnote: ²²)

In my view, this is a clear example of how Mr Dev has consistently and artificially attempted to diminish the role of PJV and I reject his written evidence that if AIL had not retained HSP it was likely it would not have obtained the Bonny Island order. (Footnote: ²³) In my judgment PJV, by their efforts, secured or facilitated this order in the sense that they were the effective cause of it being placed on AIL by the contractor, and as I have already indicated, it is conceded by AIL that PJV are entitled to commission for this order wholly irrespective of the 3.5% agent’s fee they have paid to HSP.

At a meeting between Mr Daniel Munro, Mr Rosser and Mr Bannerjee on 4 October 2002, Mr Daniel Munro made it clear that PJ V were looking to AIL to restore the agency agreement in its entirety and that he was not prepared to accept anything less. During that conversation Mr Bannerjee observed that the commission PJV would receive on the Nanhai Project would bring far greater reward than the commission from the Bonny Island Project – this echoed part of the email sent by Mr Dev on 4 February 2002 which established the general exclusive agreement (see [33]) when he set out “None of the other projects would have the potential possible from Nanhai where we have submitted our bid”. (Footnote: ²⁴)

Mr Charles has described how in his view PJV were the exclusive agent for this project and how they had worked hard to secure the enquiry for AIL. He had never previously encountered a situation where an agent was changed during the bid process.

Mr Saville has expressed his view that the work done by PJV prior to their replacement by HSP would entitle PJV to, “… at least 85% of the total commission indented for the orders AIL received”. However, as Mr Peter Munro has pointed out, it is AIL’s case that HSP were paid a commission of 3.5% even though they were brought in right at the end of the negotiations. (Footnote: ²⁵) Mr Saville had his attention drawn to the fact that HSP were paid that commission, but he maintained his view that:

Consistent with that approach (and his “sliding scale” set out at [17]), Mr Saville is of the view that a total commission level of 5% is excessive on an order of this magnitude (the project had a total value of over US$ 6,000,000).

Later, on 19 July 2004, AIL received the blanket order covering phase 6 of the Bonny Island Project.

Mr Dev specifically challenges the suggestion that PJV by its earlier success with trains 4 and 5 were the effective cause of the train 6 order being placed on AIL, or that PJV were denied the opportunity to earn commission due to the wrongful termination of an agency agreement. (Footnote: ²⁷) He has relied on Clause 25 of the Blanket Order 6807 – 1L – M015 which for Trains 4 and 5 permits the purchaser (TSKJ – Servicos de Engenharia, Limitada):

Under Clause 3 of the Blanket Order, this option expired on 31 March 2004. By that date no such order had been placed because Shell/MW Kellogg had not finalised its requirements for the bid and they did not do so until May or June 2004. However, at a meeting on that day which included Mr Dev, it was indicated that AIL could maintain prices on carbon steel valves so long as orders for train 6 were placed by the end of June 2004, but Mr Dev explained that the stainless steel valves may have to be subject to a price increase of 10% - 12 %. (Footnote: ²⁹) On 20 April 2004 Mr Dev received an email from Martyn Latham of MW Kellogg attaching details of types and quantities of valves required for Train 6 and inviting AIL to respond with prices and delivery details. The email highlighted that although AIL was being given the opportunity to bid for Train 6, its success would depend on its rates being maintained or bettered. (Footnote: ³⁰)

Mr Dev outlined certain proposed price increases (ranging from 5% – 12.5%), which prompted the following response from Mr Latham:

At the invitation of HSP, Mr Dev explained the reasons for the price increase, namely the competitive nature of the bid for Trains 4 & 5 and the increases in the costs of raw materials. He offered what he has described as a token 1% discount which, after “a series of negotiations” on matters relating to the “final details of (their) offer” (which have not been further explained or amplified), was accepted. In a “letter of intent” dated 24 June 2004 (Footnote: ³¹) it was indicated that the final terms for project 6 were to be issued, and the blanket order was placed on 19 July 2004. Accordingly, on Mr Dev’s account they “got the job at (their) price”.

Mr Dev’s evidence on this issue is as follows:

Mr Dev agreed that there were advantages in rolling-over the supplier, but he pointed out this had not been the experience at Bonny Island: Malbranque who had supplied projects 1, 2 &3 had not been used subsequently and Mr Dev was not aware of any failings on their part; accordingly, he did not accept there was an expectation as regards this project (or in this industry generally) that the same supplier would be used.

For Bonny Island, the agreed figures are:

Nanhai is one of the world’s largest petrochemical facilities - if not the largest at US$ 4.3 billion - and it is still under construction. PJV had tracked this project for many months at Foster Wheeler (a long-term client of PJV) and Bechtel. In November 2001, Mr Rosser was told that invitations to tender were imminent. On 16 November 2001 Mr Dev informed PJV that a meeting had been arranged with Mr Pillay of Foster Wheeler to discuss the Nanhai Project; PJV were asked if they wanted to join the meeting as “Foster Wheeler has been (PJV’s) customer”. (Footnote: ³⁴) Mr Rosser explained he was aware that Mr Pillay was only a peripheral figure as regards the valves side of the project, and he ensured that on the day of the meeting they met the staff more directly involved in valve related issues. (Footnote: ³⁵)

Accordingly, PJV and AIL became involved in bid evaluation, clarification and negotiation following the supply of technical information about AIL to Foster Wheeler. It is now accepted by the defendant that PJV worked conventionally as AIL’s agent for this bid, and in any event I had little difficulty in rejecting the evidence that Mr Dev gave at one stage that PJV acted as little more than a post-box for AIL and Foster Wheeler: he suggested in his written evidence that the determinative factors leading to AIL’s inclusion in the vendor list were, first, it had Shell approval for the relevant valves, and, second, it had already worked with Foster Wheeler in the Shell Malampaya Project.

In the event, AIL were included on the vendor list and the invitation to tender was addressed to both AIL and PJV. Because of the size of the project the relatively unusual device of a Framework Agreement was established, which is explained in [21] above and [62] – [65] below. AIL therefore obtained the opportunity of tendering against all Frame Agreement requirements (stainless, alloy, carbon steel, low temperature carbon steel and a few high nickel alloy valves), although in the event the Frame Agreement was more restricted in its ambit: stainless steel and alloy gate, globe and check valves whose MESC (Material Equipment Standards Codes) numbers are set out in the Frame Agreement. As to other categories of valves, the carbon steel and low temperature valves, for instance, were covered (for a period) by a Frame Agreement awarded to a Chinese manufacturer, Sufa. However, those valves were later bid for competitively on open market terms, along with other categories of stainless steel and alloy valves not covered by the Frame Agreement.

An indication of the approach taken to this project by PJV is revealed to an extent in an email sent on 28 November 2001 from Mr Dan Munro to his father, which contained the following:

An agreement was made between PJV and AIL on the 6 or 7 December 2001 establishing PJV as AIL’s agent for the purpose of obtaining orders for the Nanhai project. Mr Bannerjee was responsible for conducting negotiations on behalf of AIL in the absence of Mr Dev. It is agreed between the parties that it is necessary to consider in detail the exchanges between AIL and PJV in the period 30 November 2001 – 7 December 2001 in order to arrive at an understanding of the terms of that agreement.

At about this time Mr Peter Munro handed over the role of Managing Director of PJV to his son, Mr Dan Munro. The latter has described how he was involved, on behalf of PJ Valves “in negotiating the commission level to be received in the case of AIL receiving the Frame Agreement order for the Nanhai Project”. (Footnote: ³⁷) Given the terms of the agreement as regards the Nanhai project is of considerable importance in this case, in elaboration of the description already given at [21], it is necessary to set out how Mr Daniel Munro and Mr Dev describe the way in which the Frame Agreement would work in this context. Mr Daniel Munro first:

Mr Dev said that AIL’s commercial strategy was to use the Frame Agreement for “leverage”: to offer discounts so that it would win further business. As to the detail of this stage in the process, he provided the following description:

The Frame Agreement therefore contained detailed specifications and requirements and a high order of technical evaluation was necessary. Mr Dev explained how the MESC numbers are a unique and useful means of identifying items. A slight change in a valve might lead to a new MESC number, which could be issued if a particular valve had only been, for instance, X-ray tested. However, that said, I accept Mr Peter Munro’s evidence that the specifications for valves given in the Frame Agreement was only a preliminary guide to what was eventually going to be required, having regard to the fact detailed engineering evaluation had not been carried out at the time it was issued. At this (early) stage basic valve costs would be established, but following the award of the Frame Agreement the EPC contractors would undertake detailed valve engineering which would often reveal design differences not understood at the basic engineering-bid stage. Those design differences would normally result in some changes to the specifications, quantities and sizes of some of the valves covered by the Frame Agreement. It may also lead to new valves being ordered and the cancellation of other valves originally identified at the basic engineering stage. This was usual in the industry, as AIL would have well understood. Mr Saville has described this stage of the process as follows:

Mr Dev agreed that within the MFPA the need for valves was likely to change, although it was his evidence that in its original form it would cover the bulk of what was required for the project, particularly as regards standard valves. Generally, he suggested that the type of valves to be used would not change significantly, although the size of the valves and the quantities required would. Mr Dev conceded that if there was only a slight change in a valve specification then the valve would continue to be covered by the Frame Agreement.

The account of Mr Daniel Munro as regards the Nanhai commission negotiations between PJV and AIL contains the key ingredient that PJV wished to ensure that a clear agreement as to a fixed commission had been reached before the enquiry from Foster Wheeler was issued to AIL. (Footnote: ⁴¹) His evidence was that AIL were very proficient in getting bids put together quickly, and that although there was some pressure of time, it was not in this instance undue.

As to the terms of the agreement reached between PJV and AIL, it is necessary to set out the key contemporaneous events, which begin with the email on 29 November 2001 from Chris Rosser to Mr Dev. (Footnote: ⁴²) Mr Rosser indicated that he was expecting to receive the enquiry, but following the problem with the Aramco Berri Gas Plant (additional requirement) AIL were requested to sign an Exclusive Agency Project Agreement. (Footnote: ⁴³) Once signed, PJV intended to forward, inter alia, the enquiry package. Given the central place played by this “Agreement” in this case, it is necessary to set out its terms in full:

Parties to the Agreement: P.J. Pipe and Valve Co Ltd (PJV) & Audco India Ltd (AIL) or their associated companies.

Project: CNOOC and Shell Petrochemicals complex project, Huizhou, China;

Territory: global, not limited.

Products: Gate, globe and check valves and associated services destined for the project.

Enquiries: AIL will inform PJV of any enquiries received for the product destined for the project.

Purchase orders: AIL will provide PJ Valves with a commercial copy of each and every order for the product within 14 days of receipt at AIL.

Commission: 5% of total contract value to cover any purchase order placed destined for the CNOOC and Shell Petrochemicals complex project, Huizhou, China.

AIL to copy PJV with invoices as and when issued to customers. PJV will then invoice AIL the commission then due.

Payment will be made within 30 days of AIL’s payment receipt from the client/customer or 120 days from AIL invoice date whichever the sooner.

Commission payment: AIL payment of commission will be made by bank transfer to a PJV nominated bank.

This contract is based upon English law and the English courts in the UK will arbitrate any dispute. The judgement of the English courts shall be final.”

Although Mr Bannerjee was conducting these negotiations in Mr Dev’s absence, the latter has given evidence that the language of clause 4 (Products: Gate, globe and check valves and associated services destined for the project) was used because it was envisaged that the Frame Agreement would cover the entire project requirement for gate, glove and check valves. For his part, Mr Peter Munro has said that he deliberately utilised the language contained in this provision because he wanted clause 4 to be given the widest possible meaning. For instance, although he knew the Frame Agreement would cover the EPC contractors, he was not sure if it would cover the sub-contractors because within the process unit there might be “stand-alone” units for which sub-contractors not covered by the Frame Agreement could buy valves. Given their previous bad experience, he wanted to avoid any reduction in commission. I observe at this stage that consistent with that intention, clause 7 (commission) is, on its face, all-embracing in its ambit (5% of total contract value to cover any purchase order placed destined for the CNOOC and Shell Petrochemicals complex project, Huizhou, China).

The parties agree that, following negotiations, the commission was agreed at 3%, and, accordingly, the agent rate for the Nanhai project is not a matter which requires determination in this trial.

A copy of the email to Mr Dev and the proposed agreement was faxed to Mr Bannerjee (Mr Dev being absent for a few days). On 30 November 2001 Mr Bannerjee sent a faxed message to Mr Rosser that enclosed a signed copy of the Agreement, but it included two additional clauses:

“This agreement will have to be confined to orders received from Foster Wheeler, UK for this Project, since any orders received from other territories including orders from distributors from other regions, will be governed by arrangements prevailing in those territories.”

“Please also note although in principle we agree to 5% commission on FOB (free on board) value of Purchase orders, this may need to be jointly reviewed, should the competitive situation demand reduction of margins or sharing of commission under extraordinary circumstances.” (Footnote: ⁴⁴)

Mr Bannerjee has complained that Mr Dan Munro and Mr Rosser were putting him under pressure to sign the Agreement, which they claimed was a mere formality. (Footnote: ⁴⁵) Mr Bannerjee said in evidence that the document he sent on 30 November was intended to be the contract, and that he had accepted the first 11 items (subject to his two items).

Mr Rosser replied promptly, and given the importance of this part of the unfolding narrative, I have set out the relevant parts of the faxed letter he sent in full (it was Mr Dan Munro’s evidence that the letter was, in the main, drafted by Mr Peter Munro):

Foster Wheeler are the Project Management Contractor and as such will currently not be placing any direct orders on the project. (Footnote: ⁴⁶)

Foster Wheeler have been instructed to organise a frame agreement covering cast steel valves. This frame agreement will be awarded to a successful bidder. The frame agreement will then be passed onto the successful EPC (“Engineer, Procure and Construct”) contractors on the project with the instruction to purchase all the cast steel valves from the frame agreement holder at the agreed prices. It is anticipated that up to seven contractors will be involved.

We do not know who the successful EPC contractors will be or their location, on this project for a petrochemical complex, seen as one of the two largest outstanding contracts worldwide.

Your local agents serving the contractor will have no influence on the order placement, as their customer will not be issuing a competitive enquiry but simply using the frame agreement.

A reply to this faxed letter was sent by Mr Bannerjee on Saturday 1 December 2001 but was apparently not received until Monday 3 December. There are two versions of this reply, which are identical save that the fax number changes. It begins:

Thereafter, Mr Bannerjee focused on the issue of the level of the commission and the position of any local agents from other regions. He did not challenge the provisions in the proposed Exclusive Agency project agreement that commission would be payable for Gate, globe and check valves “destined for the project”, and that the commission was to be calculated as a percentage of the “total contract value to cover any purchase order placed destined for the CNOCC and Shell Petrochemicals complex project, Huizhou, China”. Instead, he expressed the view that “… the anticipated volume of business is expected to be very large (and as a result), the commission earnings in our opinion should be reckoned in absolute terms rather than as percentage to sales”. (Footnote: ⁴⁸) Furthermore, Mr Bannerjee agreed that his additional clause 1 in the fax of 30 November concerning orders received from Foster Wheeler should be ignored following the explanations proffered by PJV.

A fax dated 2December 2001 with a second copy dated 3 December 2001 (and again apparently not received until 3 December 2001) sent by Mr Bannerjee to Mr Munro again returned exclusively to the issue of the commission to be paid to PJV on the one hand and local agents on the other (it was suggested that “… besides a destination commission of minimum 1%, any commission payable to local agents for order originating from other regions will have to be adjusted against the base commission”. (Footnote: ⁴⁹))

The approach of Mr Peter Munro set out in an email on 3 December 2001 to Mr Dan Munro is revealing of the approach of PJV at this critical time:

The evidence of both Munros was that everything, save for commission, had been agreed by this stage, and the discussion/explanation as to how the Frame Agreement would work had taken place, together with how valve orders would be placed on the project.

On 3 December 2001 Mr Dan Munro sent two emails to Mr Bannerjee. In the one that, from its terms, appears to be the first in time, he states as follows:

In what appears to be the second email on 3 December 2001 from Mr Dan Munro to Mr Bannerjee, the former states:

Mr Bannerjee in an email to Mr Dan Munro on 3 December dealt with the commission payable to PJV, and the commission to be paid to local agents, and including, “… commission payable to local Agents for orders originating from other regions…”. (Footnote: ⁵⁴)

At some stage during 3 December 2001 Mr Dev sent a proposal by email to Mr Dan Munro as to commission which can be described fairly, in my view, as an aberration in the ongoing discussions; in the result his suggestion for a commission structure in which the percentage reduced with the passing of time was ignored. However, the language he adopted is of some importance as regards the issues I must decide: throughout he describes the commission payable to PJV would be“… for all orders received at the prices decided in the frame agreement”. (Footnote: ⁵⁵)

At some stage on 5 December 2001, Mr Dan Munro spoke to Mr Bannerjee, but it was his evidence that during that conversation no connection was made between the Frame Agreement price (or indeed the Frame Agreement itself) and PJV’s entitlement to commission.

On the documents and from the evidence generally, it is clear that the parties had agreed all the terms and including 3% commission by 6/7 December 2001, following discussions by telephone, and on that date the enquiry documents were sent by PJV to AIL. (Footnote: ⁵⁶) Although this is no longer an issue, I note Mr Dev suggested in his witness statement that the payment of this commission was contingent on PJV’s efforts having secured the Frame Agreement (Footnote: ⁵⁷) and he added that PJV, “… did not cause (AIL) to obtain the frame agreement”. (Footnote: ⁵⁸) It was his written evidence that PJV had no involvement in the negotiations and discussions, and that they did not assist AIL in this regard.

Mr Daniel Munro described how after lengthy discussions together with an exchange of emails between himself and both Mr Dev and Mr Bannerjee, they concluded that the “base commission of 5% would be reduced to 3%, because the Nanhai purchase orders would be placed by several worldwide contractors, and AIL had emphasised the need to reserve some commission for local agents”. As to the key issue of the ambit of the agreement concerning commission, Mr Daniel Munro describes matters thus:

The email referred to was timed at 12.18 and stated shortly, “I agree with what you have stated, in line with our telephonic conversation this afternoon. Please go right ahead – I will send you a fax message for your records tomorrow as I am in the middle of several other things right now”. The message which was sent the following day from Mr Bannerjee did not match this apparent agreement, in the sense that it suggested that the 2% destination and local commission may have to be adjusted, and that PJ Valves would only be eligible for a commission of 3% “under normal circumstances”. (Footnote: ⁶⁰) However, as I have indicated above, between the parties there is no disagreement as to 3% being the agreed commission rate.

Mr Dan Munro’s evidence was that following receipt of Mr Dev’s “aberrant” email of 3 December [81] in the discussions that followed with Mr Bannerjee there was no link between the Frame Agreement and PJV’s entitlement to commission. Accordingly, on his evidence when they reached a final verbal agreement on commission, it was in line with the written agreement set out at [67], and consistent with item 7 they had agreed 3% was to be paid on all orders whether covered by the Frame Agreement or not. He maintained that although the process by which the valves were obtained (purchased) was via the Frame Agreement, it did not govern PJV’s entitlement to commission. On his evidence the commission agreement covered all valves of the gate, globe or check categories irrespective of whether they were covered by the Frame Agreement or not.

Mr Peter Munro described the relevant and critical discussions as follows:

Mr Dev has described the understanding as to commission somewhat differently:

Mr Bannerjee’s account as regards these events added little to the relevant history, and he did not significantly contradict the claimant’s witnesses on the issue of the ambit of the Nanhai agreement insofar as it dealt with PJV’s entitlement to commission.

Turning to the benefits of a frame agreement, Mr Charles suggested the frame agreement awarded to the successful manufacturer would form the basis for “call-off” orders to be placed on the frame agreement holder by the different contractors building plants at this petrochemical complex. The key, in his view, was to secure the frame agreement as the contractors would be contractually obliged by Shell to purchase their valves from the Frame Agreement holder at the agreed prices. The agreement was intended to cover the entirety of the gate, globe and check valve requirements on the complex (although in the event this did not happen, as described at [92]); it increased the project’s purchasing power; and it ensured that only products acceptable to Shell were used throughout the project.

Mr Peter Munro’s understanding was that the EPC contractors would use the priced Frame Agreement to purchase the valves for their individual plants and, as a result, standardisation would be achieved (i.e. one manufacturer would supply all specific valve types over the entire petrochemical complex). It was expected by PJV that the total valve purchase could potentially reach US$30 million. I have no doubt that at the time the agreement was finalised between PJV and AIL the expectation on both sides was that, generally, the Frame Agreement was going to cover all the project requirements for gate, globe and check valves, and that the anticipated level of business was of the order of US $30 million. Indeed, as Mr Dan Munro set out in an email to his father on 28 November 2001, “… so (the) idea is that all contractors work with the frame agreement who get work on the refinery”. (Footnote: ⁶³)

In late February 2002 Foster Wheeler indicated that AIL had been successful in being awarded a Frame Agreement for a part of the project: they were appointed as supplier under the Frame Agreement for stainless steel and alloy valves on 21 May 2002, and on 27 June 2002 AIL confirmed to PJV that they had received from the Chinese Nanhai Project Office the confirmation document which appointed them the Frame Agreement holders for the alloy and stainless steel valves. PJV also advised that there was still an opportunity for them to obtain an order for the low temperature carbon steel valves and stainless trim valves. However, a decision was taken by the contractor to maximise the use of Chinese suppliers and the carbon steel and low temperature carbon steel valves were made the subject of a separate Frame Agreement awarded to a Chinese manufacturer, Sufa. By a later turn of events, the detail of which has been unexplored in the evidence before me (through no fault, I should add, of PJV), AIL were given the opportunity to bid for, and were awarded, a substantial part of the highly valuable requirement for carbon steel and other valves not covered by the original Frame Agreement. As Mr Nash has pointed out there are numerous examples of AIL “pitching” for additional orders. (Footnote: ⁶⁴)

Although, as I have indicated, AIL now accept that PJV were instrumental in helping to secure the Nanhai project, on the issue of the efficacy of the work undertaken by the company as agents in relation to this project, the evidence is wholly persuasive, in my view, that PJV were instrumental in a significant sense in securing the Frame Agreement for AIL. I am fortified in that view by the email sent on 1 July 2002 by Mr Bannerjee to Mr Daniel Munro in the following terms:

As described above, the EPC contractors were obliged to use AIL – the Frame Agreement holder – for the supply of stainless and alloy valves. Although Mr Dev rejects the suggestion, in my view AIL’s position undoubtedly gave the company some “leverage” to negotiate for the valves that were outside of that agreement, since the contractor would have a clear economic incentive to place all of his valve requirements with one manufacturer. Moreover, the existence of the Frame Agreement provided AIL with the opportunity to try to persuade the EPC contractors to purchase the “complete package” of Frame Agreement and non-Frame Agreement valves from a single source not least because of the advantages in costs.

Although Mr Peter Munro has suggested that AIL’s disclosure has been limited as regards the circumstances in which AIL secured other orders, nonetheless the indications are that contractors were tending to approach AIL directly and independently of any intervention on the part of local agents. Moreover, once the Chinese manufacturer Sufa – who were not Shell approved – lost the order for carbon steel and low temperature carbon steel valves, these were put out to tender to the Nanhai approved project manufacturers by the EPC contractors, including AIL. Accordingly, Mr Peter Munro’s evidence was that not only did the award of the Frame Agreement reduce the influence of local representation since the EPC contractors were obligated to purchase the stainless steel and alloy valves covered by the Frame Agreement from AIL, but, more generally, the agreement “opened the door” for AIL to supply other kinds of valves for the project. (Footnote: ⁶⁶) Indeed he described the success of this strategy as having enabled AIL to obtain an “almost clean sweep” of valve orders on the Nanhai project to date.

I accept, however, there would always be an element of uncertainty in this process because acceptable prices and terms would always have to be negotiated, and although, following Sufa’s removal AIL received substantial orders for such valves, this was only after they had to “bid on a competitive, open basis”. (Footnote: ⁶⁷)

Mr Dev has described how the Frame Agreement was honoured more in the breach than in its fulfilment, and that the EPC contractors required AIL to take part in a competitive tender process even though AIL had been awarded the Frame Agreement; furthermore, in many instances the EPC contractors required AIL to bid and negotiate terms on the basis of different specifications than those contained in the Frame Agreement. (Footnote: ⁶⁸) As an example of the kind of problem that arose, Mr Dev has provided the following description:

Furthermore, Mr Bannerjee suggests that PJV failed to work with the EPC contractors as he argues they should have done in order to “maximise business” under the Frame Agreement. (Footnote: ⁶⁹) As a result, his evidence was that “…AIL had to mobilise their network of agents in different countries to ensure that the successful contractors were sending AIL the enquiries”. Mr Bannerjee suggested that his main focus of his concern, therefore, was to ensure that the contractors abided by the Frame Agreement.

To date, no commission payments as regards the Nanhai orders have been made. Although in certain areas the figures remained in dispute during the hearing, on 19 May 2005 Mr Dev and Mr Peter Munro produced a document entitled Agreed quantum PJV/AIL dispute which helpfully sets out their agreement as to the central figures. As regards Nanhai they are as follows:

In April 2004 an order for this project was placed on AIL following an introduction by PJV. Damietta is only of relevance to the issues raised in this action as regards the commission calculation, and, additionally, I am asked to give judgment in the appropriate amount:

The defendant has been very dilatory in its compliance with orders made by Master Eyre and Master Rose respectively on 20 August 2004 and 16 March 2005 requiring them to produce all of the Nanhai orders. It was not until three files without indexes were served on 6 May 2005 that it became apparent, in particular, that some blanket orders (referable potentially to the Frame Agreement) had not been disclosed in compliance with those orders. Mr Dev was questioned about these shortcomings, and he agreed he did not have a satisfactory explanation for them. Generally, Mr Dev accepted the defendant had not given disclosure of orders that had resulted from what he defined as separate enquiries, even though they may have referred back to the Frame Agreement.

If compensation under the regulations should be paid on a net basis (as Mr Godwin citing Duffen v Frabo (2000) 1 Lloyd’s Rep 181 suggests is the correct approach), one relevant issue is the way in which PJV’s Bonus Scheme operates. Mr Godwin asked Mr Peter Munro some questions as to how the PJV bonus scheme for 2003/2004 was calculated and how one part of it was distributed through the PAYE system. In summary, it was his evidence that an element of the employees’ bonus was based on a profit-sharing scheme (for all employees) that was only triggered when £150,000 profit was made. Additionally, there was a further bonus scheme that was separately shared between the sales employees. Mr Dan Munro said that the entitlement to commission arose when the commission was paid by the principal, and that before 1 January 2005 sales staff were given 5% pro-rated to their basis salary on commission received for orders which they were instrumental in placing. For Bonny Island trains 4 & 5, commission was due to Messrs Rosser and Charles. Mr Godwin has submitted, with some force, that only slender material has been put before the court as regards two areas of expenses in particular: the expenses related to the commission payments and the fixed overhead expenses for 2003 – 2004. It is submitted the accounts produced by Mr Peter Munro are not sufficiently detailed to enable the court to reach an understanding of these two areas in particular (but also in relation to expenses generally). I accept the evidence makes it difficult to arrive at definite figures if compensation is to be calculated on a net basis.

Mr Saville has expressed the view, which I accept without hesitation, that the work undertaken by PJV relating to the AMEC Berri, Bonny Island and Nanhai projects met or exceeded the reasonable expectations of a principal as to the performance of its agent in this industry. Further, I consider his conclusion is well-founded that the decision of AIL to remove PJV as its agent on both the AMEC Berri and Bonny Island transactions was neither justified nor acceptable.

At common law, an agent is entitled to commission where it was the, or an, effective cause of the relevant transaction (see Bowstead and Reynolds on Agency, 17^th edn, Article 59). As the editors explain, the inquiry that must occur is whether the actions of the agent really brought about the event, and it is seldom conclusive that there were other events that could each be described as a cause. (Footnote: ⁷¹)

It is accepted that PJV assisted AIL to obtain the order for the Bonny Island Project phases 4 & 5, so as to be entitled to a reasonable commission on that order. If is further accepted that AIL replaced PJV with HSP as its agent for the Bonny Island project, and this constituted a repudiatory breach of the General Exclusive Agency Agreement made in February 2002.

As to the level of commission, PJV’s argument is that, as a matter of generality and subject to negotiation on a project-by-project basis, the figure for this is 5% whilst AIL do not accept there is any particular “rule of thumb” or “base figure”. On this issue I consider both parties have overstated their respective cases. PJV’s position was unrealistically inflexible given the commercial realities of this industry, whilst AIL’s case, as described by Mr Dev, would have resulted in a level of uncertainty as to terms that the agent would have found unacceptable. I observe that on this issue, Mr Godwin advanced AIL’s case principally on the basis of Mr Saville’s evidence rather than on the evidence of Mr Dev.

Mr Saville is of the opinion that the “rule of thumb” for commission levels in the oil, gas and petrochemical supply business is 5% on an FOB value; he suggested this is a “reasonable” figure for a “typical” transaction of a “standard” product. However, I entirely accept his evidence (which is commercially realistic) that this is not an immutable figure, and it will be fact-sensitive, particularly when either significantly low or large value orders are involved. (Footnote: ⁷²) I have set out the sliding scale that Mr Saville states is generally followed at [48]. Ultimately, commissions are based, in his view, “on what the project will stand”. In this regard, although I should take account of the customs or trends of this industry, ultimately the answer is to be found in my determination of the intention of the parties at the relevant time.

Mr Nash’s argument for PJV can be summarised as follows. He points out that on the Aramco Berri and Shell Malampaya projects PJV had proposed, and AIL had accepted, a 5% commission. As to Nanhai, he submits that AIL had accepted a “base commission” of 5%, which was reduced to 3% to take account of the local and destination commissions. He prays in aid the evidence of Mr Saville on this issue, and the fact that particularly with the General Exclusive Agency Agreement it was entirely open as to the value of the projects that might be secured. In those circumstances it would have been impossible to have any “project sensitive” discussions about commission until the details of particular projects became known. However, he submits that the evidence points persuasively to an understanding that there was a 5% base commission that would be the subject of later negotiations. Finally he submits that in the absence of any agreement either raising or lowering that base commission, it would have been maintained at 5%. Clearly, given the history of PJV’s involvement as AIL’s agent in the Bonny Island Project, any further negotiations as to the rate of commission were pre-empted by the actions of AIL.

For AIL, Mr Godwin has suggested that support for a commission level of 3% - 4% is found in the fact that HSP were paid at 3.5% when they were substituted for PJV as regards Bonny Island phases 4 & 5. I note, however, that no documentation has been introduced to support that contention. Notwithstanding Mr Dev’s evidence that the commission wholly depended on the particular circumstances of the project in question, Mr Godwin also relies heavily on Mr Saville’s expert view, particularly as reflected in his evidence as to the sliding scale. On that basis, Mr Godwin has submitted that a commission of between 3% and 4% would be reasonable for orders of the magnitude of phases 4 & 5.

Whilst I accept that PJV appeared to request 5% commission regardless of the value of the order, in my view the commercial imperatives of this industry and these agent/manufacturer relationships are such that with high value orders (essentially over £2,000,000) it is likely that a reasonable commission will be less than this “usual” PJV figure – otherwise, the payment to the agent would be unrealistically high and it would be greater than “the project would stand”. Neither side would have intended such a result. On this issue I accept Mr Saville’s evidence that normally a manufacturer will seek to pay a commission in the 3% - 4% bracket for an order of this value. However, the complicating factor is that AIL paid HSP 3.5% for a relatively small amount of work undertaken late in the day. The vast majority of the complex work required to secure the Bonny Island order had been undertaken by PJV, and in the light of that figure having been paid for the short-term contribution of HSP, it seems to me that both parties have demonstrated their intention to “buck the trend” as to the level of commission that the industry would expect for an order of this value. Indeed, PJV, as Mr Dan Munro has explained, had a critical role to fulfil – that of reassuring MW Kellogg as regards Indian valve manufacturers.

On the basis that the parties clearly intended, therefore, that the reasonable commission for this order would be higher than the industry standard, in my judgment the commission rate to which PJV is entitled is 4.5%. I accept Mr Saville’s evidence that 5% is excessive for an order of this magnitude, and in the premises I do not consider that either of the parties intended for commission to be paid at that level. However, in this particular instance, I consider that a higher than usual figure is appropriate and, objectively assessed, was intended.

In the result, for the Bonny Island Project phases 4 & 5 PJV is entitled to 4.5% commission on orders worth US$ 6,352.819.05.

It is in issue whether the blanket order received by AIL for phase 6 of the Bonny Island project was attributable to PJV’s efforts carried out before the termination of the February General Exclusive Agency Agreement in December 2002: put shortly, the parties dispute whether PJV was the effective cause of the order placed for phase 6 (as to “effective cause”, see [104]). Additionally, the claimant’s first alternative claim in this regard is disputed, namely that PJV would have been the effective cause of AIL securing phase 6 (so as to earn a commission) following further efforts on their part if the General Exclusive Agency Agreement had run its course to 31 December 2003, as is PJV’s claim for compensation under the Regulations.

As already set out above at [50], contained within the phase 4 and 5 order was an option for a further blanket order to be placed on AIL for phase 6. Mr Nash has emphasised that phase 6 was apparently not put out on a competitive basis, and notwithstanding the expiry of the option, it is clear that the contractor would have wished, if possible, to place that order on AIL (who had successfully contributed to phases 4 & 5). Furthermore, Mr Nash argues notwithstanding the apparent significant rise in prices, AIL secured the business having offered no more than a “token discount”. I remind myself that, in any event, for the reasons canvassed above, an agent would rarely, if ever, negotiate prices, and in that sense in this industry any discussions as to price conducted by the manufacturer will be immaterial for the purpose of establishing whether the efforts of the agent were (otherwise) the effective cause of the order being placed.

Mr Godwin has argued that PJV was not the effective cause of the order being placed for phase 6; he has stressed that this blanket order was placed over six months after the expiry of the General Exclusive Agency Agreement, which on PJV’s case was December 2003. Mr Dev has emphasised that AIL was not certain – the company was not “sure” or “confident” - they would secure this order on the significantly increased prices offered.

I bear in mind that with Bonny Island, in particular, the “rolling-over” of orders from one project to another was not inevitable, particularly when the change in manufacturer from Malbranque following phases 1, 2 and 3 is considered. Additionally, there was an element of negotiation between AIL and the contractor before phase 6 was placed on AIL. That said, I am particularly impressed by both the fact that this phase was never put out to competitive tender and it was secured by a token discount only being deducted from significant price increases. AIL were able to secure the order for phase 6 without having to satisfy the contractors as to its suitability as a supplier and without having to bid competitively. In those circumstances, and bearing in mind particularly the lack of evidence of any significant negotiations on the part of the defendant, I conclude on the balance of probabilities that securing phase 6 was mainly as a result of PJV’s actions in originally obtaining the order for phases 4 & 5. Put otherwise, PJV in securing phases 4 & 5 for this competent manufacturer was the effective cause of the contractor placing the order on them for phase 6. Notwithstanding the departure of Malbranque following phases 1, 2 & 3 (which, in any event, has not been explained on the evidence), once AIL had demonstrated it could successfully fulfil its contractual obligations under phases 4 & 5, and so long as they could justify any price increases, the advantages to the contractor made it a near certainty that the order would be rolled-over. In my view the fact that other events (such as AIL’s fulfilment of its contractual obligations under phases 4 & 5 or the slight negotiations over price for phase 6) could be described as a cause, or causes, of the laying of the order for phase 6 on AIL is immaterial given that the action of PJV in securing phases 4 & 5 was the effective cause.

It follows that I conclude that PJV is entitled to commission (as a debt claim). In the result, for the Bonny Island Project phases 6 PJV is entitled to 4.5% commission on orders worth US$ 2,353,494.47.

Dealing with the first alternative basis on which the claimant’s case is put (as regards its claim for damages), Mr Nash has argued that “PJV claims damages for having been deprived of the opportunity of earning the commission on the phase 6 transaction, on the basis that the relevant commission would have been earned before the agency would have terminated lawfully by effluxion of time on 31 December 2003”. Given my conclusions set at [116], I accept that by 31 December 2003 PJV would undoubtedly have done sufficient to secure the order for phase 6 so as to entitle them to commission. In those circumstances I would have awarded damages to reflect this “lost opportunity to earn commission” following the wrongful early termination of the agreement, if I had not accepted their debt claim.

Turning to the second alternative basis on which the claimant’s case is put under this head (for commission under Regulation 8 of the Commercial Agents (Council Directive) Regulations 1993) the Regulation is in the following terms:

the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated (my emphasis); or

…”

Bearing in mind my conclusion set out below that PJV is a commercial agent, the reasoning applied to the common law test of “the effective cause” set out at [116] applies equally here: the phase 6 transaction was “mainly attributable” to PJV’s efforts; moreover, I accept Mr Peter Munro’s (uncontested) evidence that this occurred within a reasonable period – the gap between the order for phase 4 & 5 in November 2002 and phase 6 order in July 2004 was normal given the engineering requirements of large-scale petrochemical projects. In my judgment there is no discernible difference, certainly as applied to the facts in this case, between the two tests: “mainly attributable” and “the effective cause”. However, compensation under the Regulations should not duplicate an award otherwise made (Footnote: ⁷³), and given my conclusions as to the claimant’s entitlement to commission as a debt claim, I make no order for compensation in this regard under the Regulations, which is put in the alternative to the damages claim.

It is clear that there is a great difference in the positions adopted by the claimant and the defendant as regards Nanhai, as the figures set out at [99] reveal, but it is accepted by the defendant that PJV assisted AIL to be nominated under the Frame agreement for supplies of stainless steel and alloy gate, glove and check valves for this project.

In a nutshell PJV’s argument is that commission is payable on all gate, globe and check valves supplied by AIL to the Nanhai project. On behalf of AIL it is submitted that commission is only payable on stainless steel and alloy valves identified specifically or precisely in the Frame Agreement by their MESC number, together with particular “variants” of those valves (i.e. where essentially the same valve is involved but a new MESC number has been allocated, for instance following testing), whether or not they were ordered as part of a larger package.

Turning to the detail of those arguments, Mr Nash submits that the agreement finally reached between the parties on or about 6 December 2001 included the clear and essential link between the placing of any orders for gate, glove and check valves on the one hand, and PJV’s entitlement to commission on the other. Mr Nash has emphasised not only the evidence of the Messrs Munro on this issue, but also Mr Bannerjee’s agreement with the following passage in Mr Peter Munro’s witness statement:

Mr Nash contends that if there is (irreconcilable) conflict between the parties on this issue, it would be necessary to resolve it by reference to the objective principle i.e. by determining what reasonable people in the position of the parties would have understood to be their agreement based on the communications at the time. Mr Godwin agrees that the question for the court is what (objectively assessed) was agreed between the parties. However, Mr Nash submits that the three principal players, the Messrs Munro and Mr Bannerjee are agreed that the relevant terms (save as to the commission rate) are to be found in the written agreement set out at [67]. Mr Nash submits private assumptions are irrelevant and the court should focus on exactly what was agreed.

Mr Godwin suggests that all of those involved in the negotiations understood that the enquiry from Foster Wheeler would cover the project requirements for gate, globe and check valves, and that whoever bid for and obtained the relevant Frame Agreement(s) would be assured of obtaining all the orders for the relevant valves for the Nanhai Project. Accordingly, it is argued on behalf of the defendant that the evidence revealed, in an essentially unassailable and uncontradicted way, that the precise terms of the Frame Agreement was the sole mechanism which would generate PJVs’ entitlement to commission (subject to the addition of certain “variants” as described at [122]). I interpolate at this stage to observe that in my view this interpretation of the evidence is flawed: as I have already set out at [68], Mr Peter Munro in uncontradicted evidence (which, in any event, I accept) set out that he was concerned that the Frame Agreement would not cover, for instance, all of the sub-contractors. Furthermore, it was clear that the precise descriptions of the valves ordered under the Frame Agreement would change: it was essentially a crucial preliminary guide (see [64] and [65]). Therefore he sought to ensure that commission would be paid on valves supplied by AIL both within and without the Frame Agreement.

Nonetheless, Mr Godwin submits that “…since both parties anticipated that the orders to be covered by the envisaged Frame Agreement and the orders on which PJV would receive a commission would be the same, there was no need to distinguish in the negotiations, and including in the Exclusive Agency project agreement, between gate, globe and check valve orders placed pursuant to the Frame Agreement and gate, globe and check valve orders on which PJV were to receive a commission”.

Mr Godwin further contends that PJV were seeking an agreement in relation to commission that was based on the Exclusive Agency project agreement but which included certain additions and/or alterations as mutually agreed by the parties. He submits the critical agreed elaboration on that draft written agreement relevant to this issue was set out in the email of 3 December 2003 from Mr Dan Munro to Mr Bannerjee on 3 December in which he stated:

Finally, Mr Godwin submits that subsequent events are irrelevant and the court must determine the terms of the agreement on the basis of what was agreed at the time.

Against that background, I turn to my assessment of the relevant part of the agreement regarding commission reached on or about 6 December 2001. Although a substantial quantity of evidence has been adduced and detailed rival positions developed, I consider that it is relatively easy to discern the relevant term or terms.

First of all it is necessary to determine whether the descriptions given by the principal participants as to what was covered by the agreement (Footnote: ⁷⁵), along with the other evidence in the case, demonstrate that without limitation or qualification the agreement covered all gate, globe and check valves of whatever kind provided by AIL – in which case the claimant would succeed on the widest formulation of its argument – or whether it was agreed there were limitations or qualifications as to the valves covered by the agreement.

I have borne carefully in mind that AIL obtained the opportunity of tendering against all Frame Agreement requirements (stainless steel, alloy, carbon steel, low temperature carbon steel and a few high nickel alloy valves), although in the event the Frame Agreement they were awarded was more restricted in its ambit: stainless steel and alloy gate, globe and check valves. The scope of AIL’s field of interest at the outset was clearly more wide-ranging than the limited range of valves covered by the Frame Agreement: Mr Rosser has described how AIL were concerned, for instance, to secure an order for carbon steel and low temperature carbon steel valves. (Footnote: ⁷⁶) At the time the agreement was reached between AIL and PJV on or about 6 December 2001 it was not known that the Frame Agreement would be limited to the extent described; instead, PJV agreed to advance AIL as a manufacturer of a wide range of valves. At the time the Exclusive Agency Project Agreement was drawn up the enquiry from Foster Wheeler for the Frame Agreement had not been released.

Furthermore, as indicated above, once an order in this industry has been secured and successfully delivered, further orders may easily result: a key stage is undoubtedly the first order. Having been included on the approved project manufacturer’s list and nominated as a supplier under the Frame Agreement for alloy and stainless steel gate, glove and check valves, AIL was also free to tender against enquiries from the EPC contractors who were restricted to issuing non-Frame Agreement valve enquiries to the suppliers included on the approved project manufacturers’ list. AIL apparently was the only Frame Agreement holder to win orders for non Frame Agreement valves. (Footnote: ⁷⁷)

I give full weight, therefore, both to wide range of valves PJV assisted AIL to bid for and the advantages – the leverage – they gained by the award of the Frame Agreement. As Mr Saville puts it “… it is normal practice where a supplier has been used on previous phases of a project for there to be commercial incentives to continue with the same supplier to achieve engineering and administrative savings”. (Footnote: ⁷⁸) However, notwithstanding those important factors, even when they are considered along with the descriptions of this agreement given by the relevant witnesses as set out at [84], [87], [88] and [127], in my view neither side intended at the material time that this term was to be open-ended in the sense of covering, without limit or restriction, all gate, globe and check valves provided to the project by AIL.

The email of 3 December 2003 from Mr Dan Munro to Mr Bannerjee which set out Mr Dan Munro’s understanding of his company’s entitlement to commission – it should followthe “simple principle” of whichever agent facilitated the order should receive remuneration – not only reflected the agreement between the parties, but it also represented the position more generally in the industry on this issue. (Footnote: ⁷⁹) Therefore, at a critical point in the negotiations as to terms, PJV made this proposal as regards their entitlement to commission and AIL did not disagree with the suggested term (which I observe was wholly in line with their general stance throughout their business relationship with PJV, namely that the payment of commission should be linked directly to effective work on the part of the agent that led to the placing of an order). Further, at [60] I have set out the email from Mr Dan Munro to his father in which he stated as regards Nanhai “ … if we help them obtain this order then the commission is ours”, thereby firmly linking the entitlement to commission with the work undertaken in order to secure the order. Finally on this issue, the email rehearsed at [76] from Mr Peter Munro to his son also reveals PJV’s “intentions”: they believed that the Frame Agreement would cover all of the valves for the project (“…any commission must cover all the work obtained on this project and the total influence the frame agreement will have in all order placement on this project from wherever it is purchased”). That further demonstrates to my mind that PJV intended their commission to be dependent on securing orders. In the premises, I unhesitatingly conclude that it was a term agreed by the parties that AIL became obliged to pay commission if PJV had facilitated the relevant order.

It follows an important issue then arises as to the meaning to be attached to that expression (“facilitated the order”) in this context. It seems to me this concept carries the same, or a closely similar, meaning to both the common law test of an agent having been “the effective cause” of the transaction and the test under The Commercial Agents (Council Directive) Regulations 1993 of the transaction being “mainly attributable” to the agent’s efforts. (Footnote: ⁸⁰) In my judgment, the agent would have facilitated the order if it was either the effective cause of it, or if the order was mainly attributable to its efforts. I can see no reason in logic or common sense to attribute any different meaning to these words.

With that in mind, I turn next to the consequences of that conclusion as regards PJV’s entitlement to commission for the Nanhai project. First, I have no difficulty in rejecting the suggestion that commission was only payable on stainless steel and alloy valves identified specifically or precisely in the Frame Agreement by their MESC number together with the “variants” of those valves, in the sense described above. Mr Dev agreed that within the Frame Agreement the need for valves was likely to change, although his position on this was there would not be a great degree of variation, particularly with standard valves. However, in light of the evidence summarised above, particularly at [64], I have no doubt that it was readily understood and agreed by both sides that the Frame Agreement was a good general guide to the valves which would be required, but for the particular valves covered by the order (as it turned out, stainless steel and alloy gate, globe and check valves) the detail of the requirement would change, following the detailed engineering evaluation that had not yet been carried out at the time it was issued. In my judgment PJV has established on balance they facilitated the valve order for all stainless steel and alloy gate, globe and check valves. Although the evidence on this issue has been to an extent limited, as with the valves supplied by AIL under Bonny Island phase 6 the material indicates AIL secured the orders for those valves without having to satisfy the contractors as to its suitability as a supplier and without – certainly significantly – having to bid for them competitively. In those circumstances, bearing in mind the lack of evidence of any significant negotiations on the part of the defendant for these valves, I conclude on the balance of probabilities that PJV facilitated the order for all the stainless steel and alloy gate, globe and check valves for the Nanhai project.

Accordingly, I reject the argument that the agency agreement was limited to the particular valves referred to by their MESC numbers and the “variants”. In my judgment, PJV are entitled to commission on all the valves supplied by AIL of the general type covered by the Frame Agreement (stainless steel and alloy gate, globe and check valves) because PJV had facilitated the order(s) for those valves.

However, different considerations apply to the orders received by AIL for the Nanhai project for valves not covered by the Frame Agreement: the carbon steel and low temperature carbon steel valves. As described in [92] above, Mr Peter Munro on behalf of PJV considers the Frame Agreement “opened the door” for AIL to supply other kinds of valves for Nanhai. I have no doubt that is correct, but I consider that creating the opportunity in this way did not have the effect of facilitating the orders for these different kinds of valves. The carbon steel and low temperature carbon steel valves were put out to tender to the Nanhai approved project manufacturers by the EPC contractors, and AIL had to bid for the contracts and it had to negotiate commercially acceptable terms. This was not the mere rolling-over of an existing order in the sense that occurred with Bonny Island phase 6 (Footnote: ⁸¹); there was no near certainty that AIL, having been awarded the particular Frame Agreement, would secure these further orders for different types of valves; and they had to bid competitively. Accordingly, although the role of PJV is not immaterial (given its successful role as agent in securing the Frame Agreement), I reject the suggestion that it facilitated these wider orders for carbon steel valves; put otherwise, they were not the effective cause of the orders and the contracts were not mainly attributable to PJV’s efforts. AIL had to bid commercially against others unaided by PJV (albeit from its advantageous position as a Frame Agreement holder) and the significant work undertaken to secure the later orders was not performed by PJV.

In the result, for the Nanhai Project PJV is entitled to 3% commission on orders worth US$ 9,302,108.18.

I have set out the role of an agent in this context between [8] – [14].

It is in issue whether PJV is entitled to compensation under The Commercial Agents (Council Directive) Regulations 1993 (“the regulations”) and, moreover, the amount of compensation arising thereunder is disputed. On the latter issue, the parties are at odds as to whether in calculating compensation, this should be achieved by reference to the gross or the net amount of commission that PJV might earn.

The first (and main) question is whether an agent such as PJV is a commercial agent for the purpose of the regulations. Under Regulation 2, a commercial agent means “…a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”.

It is undoubtedly the case that PJV did not have authority to negotiate sales in the sense that they were not empowered to agree terms or pricing. As the joint expert Mr Saville has observed (see [13]):

This is a factor substantially relied on by Mr Godwin. He submits that this lack of authority to negotiate the sale of goods demonstrates PJV was not a commercial agent within the regulations. However, that limitation on their ability to act has to be put in the relevant overall context of the role of an agent in this industry: in particular, the project’s particular requirements have to be analysed and understood, and thereafter the contractor has to be persuaded that the manufacturer/client produces appropriate valves to an acceptable standard. This will frequently lead to extensive exchanges concerning the qualifications and standards that are imposed on manufacturers and their ability to meet them. The position for PJV is that although it is accepted an agent does not have authority to negotiate commercial terms and pricing with contractors when “negotiate” means either to engage in a bargaining process or to “haggle” in relation to terms or price, they maintain nonetheless they had authority to “negotiate the sale” of AIL’s products in what they submit should be understood as the wider sense of the term “negotiate” (see [152]).

The regulations were introduced by statutory instrument into English law in order to implement the Council Directive on the coordination of the laws of the Member States relating to self-employed commercial agents (86/653/EEC). The duty of the courts of England and Wales in construing and applying the regulations is to give effect to the manifest purpose of the directive under which the regulations are made. As Lord Templeman said in Lister v Forth Dry Dock and Engineering Co Ltd(1989) 1 All ER 1134 at 1139; (1990) 1 AC 546 at 558:

Morison J considered the European and domestic legislative history of the Directive and the Regulations in Tamarind International Ltd. v Eastern Natural Gas (Retail) Ltd[2000] CLC 1397 (and in particular between paras. 10 – 21). As Morison J observed:

It is apparent, therefore, that insofar as it can be achieved without distorting the meaning of the Regulations, they should be construed in accordance with their purpose: promoting the freedom of establishment.

In addressing the approach of the court, Morison J put the issue as follows:

On that basis, the question of whether the agent actually participates in discussions on price or commercial terms has less relevance than whether the agent is retained to develop goodwill in his principal’s business.

As the Law Commissioners in their report (Law Com. No. 84) on the draft European Directive pointed out, the term “commercial agent” as used in the directive is clearly based on the German Handelsvertreter or Handelsagent; the latter performs certain functions on a permanent basis for a standing client (para. 16). At paragraph 21 the Law Commissioners observed that the definition of commercial agent was very wide and they referred to a German case where it had been held that a man employed to win customers for a dancing master fell within section 84 of the German Commercial Code (upon which Article 2 of the Directive is based). However, I should stress I do not consider that decisions of the German courts from over 20 years ago, and reached before the Directive was implemented, are of any great assistance. In this context Mr Nash submitted that what distinguishes a commercial agent from other agents used in commerce is the continuing authority to act which results in both the establishment of goodwill and indeed a form of partnership with the principal (the manufacturer) in this particular market.

The Guidance Notes issued by the Department of Trade and Industry in September 1994 contains the following passage as regards agents:

In Parks v. Esso Petroleum Company Limited (1999) 18 Tr. L. Rep. 232, Morritt LJ, in the context of a case with very different facts concerning someone who occupied a service station under a motor fuels agency agreement, gave a wide meaning to the word “negotiate” when applying these particular Regulations. He adopted the Oxford English Dictionary definition of negotiation: “(2) Trans. To deal with, manage, or conduct (a matter, affair etc., requiring some skill or consideration)”, and observed this definition does not require a process of bargaining in the sense of invitation to treat, offer, counter-offer and finally acceptance, more colloquially known as a haggle. Accordingly, following this approach, it would be necessary to consider, inter alia, first whether the suggested agent dealt with, managed or conducted the relevant transaction and second whether a material process of negotiation was involved.

Mr Godwin has underlined that Morritt LJ referred only to a secondary definition of the word “negotiate”, and that the primary meaning of the word given in the New Oxford Dictionary (1998) is “verb 1. – try to reach an agreement or compromise by discussion with others”. Moreover, in the Oxford English Dictionary 1989 the primary meaning is given as, “… To hold communication or conference (with another) for the purpose of arranging some matter by mutual agreement; to discuss a matter with a view to some settlement or compromise”. It is the defendant’s submission that on either of these definitions, to negotiate the sale of products is to engage in a process of discussion with others with a view to reaching agreement on the sale and, accordingly, on the terms of sale, including price, specification, delivery and other matters. On that basis, Mr Godwin argues that where an intermediary has no continuing authority to negotiate such terms, in the sense of engaging in discussion with a view to reaching agreement about them, he has no continuing authority to negotiate the sale within the ordinary meaning of those words, and, therefore, is not a commercial agent within the meaning of the regulations.

I find Mr Godwin’s submissions place too narrow an interpretation on the word “negotiate”, although I accept that one of a number of factors that may demonstrate the existence of a commercial agency is whether the individual concerned had the authority to negotiate the sale of relevant products. In Tigana Limited v. Decoro Limited [2003] EWHC 23, it was accepted without argument that the agent in that case (who had been appointed as the defendant’s sales representative in the leather upholstery market) was a commercial agent within the meaning of the Regulations, and Mr Nash submits the description of his role as set out by Davis J is similar to the function fulfilled by PJV in the present case:

PJV’s role was to deal with and conduct (and, in part, manage) the relevant discussions and transactions at the time when the manufacturers were being selected by the contractor; in particular, they effected the crucial introductions and they played a significant role in persuading the contractor to be interested in AIL’s products, not least because of their own real standing in this industry. Thereafter, they assisted in ensuring that their client was placed on the approved list of vendors and received the invitations to tender, in part by putting in an appropriate bid; they assisted with quotations and queries; and they provided feedback and advised on how the quotation could be improved. In both the short and the long term they were retained, inter alia, to develop goodwill on the part of AIL. The purpose of the Directive, in my view, was to provide protection to agents by giving them a stake in the goodwill which they have generated for the principal, and as a result the courts should avoid a limited or restricted interpretation of the word “negotiate” that would exclude agents who have been engaged to develop the principal’s business in this way, and who successfully generated goodwill for the manufacturer, to the latter’s benefit after the agency terminated. In the result, I conclude PJV acted as a commercial agent for the purposes of the Regulations, notwithstanding their lack of authority to progress agreement on commercial terms or prices.

I turn to the second question: how should the compensation under Regulation 17(6) and (7) be calculated?

Regulation 17 provides as follows:

deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or

have not enabled the commercial agent to amortise the costs and expenses that had incurred in the performance of the agency contract on the advice of his principal.”

Neither paragraph 9 nor regulation 18 are relevant to this case.

In the Report on the application of article 17 of Council Directive on the ccordination of the laws of the Member States relating to self-employed commercial agents (86/653/EEC) (“the 1998 Report”) it is observed that the compensation system was based on French law dating back to 1958, the aim of which was to compensate the agent for the loss he had suffered as a result of the termination of the agency contract. Judicial custom in France fixed that level of compensation as the global sum of the last two years commission or the sum of two years’ commission calculated over the average of the last three years of the agency contract, although the court retained a discretion to award a lesser sum.

Within the courts of Great Britain there has not, thus far, developed an entirely consistent approach to compensation under these Regulations. On occasion the French approach has been followed, most notably in King v Tunnock Ltd[2000] IRLR 570 (Inner House of Session), whilst in other cases judges have sought to identify other principles or factors as being relevant to the amount of compensation (for instance, by reference to the express terms of the deeming provisions in regulation 17(7)(a)), or more generally: Duffen v Fabro S.p.A. [2000] 1 Lloyds Rep. 180 (HHJ Hallgarten QC); Tigana Ltd. v Decoro Ltd (supra)). In Tigana, Davis J analysed fully the competing approaches and expressed his conclusions (with which I wholly agree) in these terms:

First, it seems to me as a matter of principle that if it were intended by the Directive that, on matters of compensation, French law were to apply, then it would and should have said so. Thus in Nicolaus Corman & Fils SA v Hauptzellamt Groman 1982 ECR 13, the court said (at paragraph 8):

This general principle is not alluded to in the judgment in King v Tunnock. This may be because the Court of Session was taking the view that the court was not seeking to apply French law, as such, as a matter of decision but only having regard to it with a view to achieving a harmonised approach: cp the comments of Lord Hamilton in Roy v M.R Pearlman Ltd 1999 SC 459 at p 469 G-H and the comments of Mr John Mitting QC (sitting as a deputy Judge of the High Court) in Moore v Piretta PTA Ltd 1999 1 ALL ER 174 at p176. I can, at all events, certainly see that a court which is concerned with questions of compensation under Regulation 17 would wish to have regard to statements as to French law and practice – which in my view can sufficiently be garnered from the 1996 Report itself – as explaining the background to and purpose of the Directive. I would also regard it as unexceptionable for a court to choose to have regard to it as one factor, by way of a comparator, in the overall consideration of an award of compensation under Regulation 17. Indeed it may well be, judging by the contents of paragraphs 50 and 51 of the judgment in King v Tunnock (and particularly the last sentence of paragraph 51) that the Court of Session considered that that was what it was doing: although it must be said there are passages elsewhere in the judgment which seem to be putting it rather more strongly. Be that as it may, I do not think what is said to be French law and practice can be used to dictate the approach to, or operation of, the assessment of compensation under Regulation 17; and to the extent that Mr White’s submissions went that far I reject them.

The Directive has left it to each of the Member States to implement the Directive. Courts in England and Wales will be assessing compensation awards under Regulation 17, applying the Agency Regulations under an agency contract governed (ordinarily) by English law. Where an English court is concerned to construe, or give effect to, a contract governed by French law then of course it will (on production of appropriate expert evidence) seek to ascertain what the French law is and then apply it (see, indeed, the express provisions of Regulation 1(3), as amended). Apart from that, however, it seems to me wrong for the English court, when considering the issue of compensation under regulation 17, to attempt to put itself in the shoes of a French court in the case of a contract governed by English law to which the Agency Regulations (applicable in Great Britain) apply. Otherwise (in the words of Judge Hallgarten QC in the County Court decision of Duffen v Frabo 2000 ILL Rep 180) “ it will find itself drawn into attempting to mimic what a French court would actually have done, a task which it is ill-equipped to perform”. Besides, given that under French law the Judge has a discretion to depart from the “two year rule”, it would seem to be an impossible hypothetical task to identify on the facts of a particular case how or to what extent a French court would exercise such a discretion. It is, surely, for the court actually seised of the case to make its own decision and exercise its own judgment under Regulation 17.

It seems to me that flexibility is critical is this area, given that cases and circumstances vary infinitely. A line of reasoning, based on a certain selected approach, may lead to a fair result in some instances but not in others, and in this regard I echo the following part of the judgment of Davis J in Tigana:

For my part, I consider the court in a given case should not be subject to the straight-jacket of one particular test or approach: for instance, given the short life of this general agency agreement it is clear that the two year tariff applied usually in the French courts would be of little assistance is securing a just result in this case. The relevant approach to be applied when assessing compensation will be largely fact-dependent, and judges should be free to identify those matters that are relevant to the circumstances of a particular case. This is not to absolve the judge from the need to make a decision on a principled, logical and just basis – to the contrary, it is to ensure that there is an appropriate and fair result, bearing in mind the particular circumstances of the case. Mr Nash accepts that compensation under this head cannot be calculated with a high degree of precision and that something of a broad brush approach, of necessity, will be applied.

Since it was raised in argument, I should make some brief observations on the approach of Judge Hallgarten QC in Duffen as outlined in the following passage:

In that case it is unsurprising that the judge focussed on the extent to which the defendants had benefited historically from the agent’s activities because the agency had been a disaster as regards both new and existing customers. In my view, this provision that allows for compensation to be paid when damage has occurred because circumstances have deprived the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent, does not include as a necessary precondition of its operation a finding that the defendants had benefited from the agent’s prior efforts. Often that will be a highly relevant and material issue, but it is not an essential finding. In my view, the reference in Regulation 17 (7)(a) to the agent “providing his principal with substantial benefits” may have a prospective or retrospective focus (or both), depending on the circumstances.

I turn, therefore, to the approach to be adopted in this case. One factor that must be borne in mind is that the claim under the Regulations runs concurrently with the other claims in this case. As Judge Hallgarten QC pointed out in Duffen “… it is plain (this) regulation is not meant to duplicate what may otherwise be recoverable at common law”. (Footnote: ⁸³) As a general submission, I accept Mr Nash’s argument that the essential question at this stage of the enquiry as far as the claim for compensation under the Regulations is concerned is to assess whether, if the agency had not been terminated in December 2002, PJV would have been able to earn commission by proper performance of the agency. This involves determining whether this agency was a valuable one that was likely to have generated commission during the unexpired 12 months, and I adopt on this issue the approach deployed in Duffen that “… the right approach is simply to look at the earnings which might have accrued to the claimant during (the relevant) period … had he remained the defendant’s agent”. (Footnote: ⁸⁴)

The claimant submits that the correct approach – which, as formulated, is a variation of the French model – is to take the average annual commission earned over the two years 2003 to 2004. This is achieved by establishing the commission claimed in respect of all the relevant projects (Nanhai, and Bonny Island phases 4, 5 and 6), aggregating that commission over the two-year period and on that basis reaching an “annual commission” of US$ 587,533.39. Mr Godwin objects to this approach on the following principal bases: first, for Bonny Island the commission rate is put (incorrectly) at 5%; second, the claimant is not entitled to any commission for Bonny Island, phase 6; third, the claimant has incorrectly included Nanhai (a project in relation to which it is suggested the claimant has never maintained it acted as commercial agent, and in any event there exists a contractual obligation to pay commission as it falls due); and, fourth, compensation should be calculated on the basis of commission net of expenses and not on gross figures.

Against the background of those submissions, it seems to me that the court should attempt to gauge what has been lost by the termination of the general agency by the defendant whilst avoiding any “double counting”, given that I have found for the claimant on the concurrent claims. The period in which the agency was actually in place was about 9 months between February 2002 and December 2002, following AIL’s repudiation. It should have lasted for two years, and if it had been allowed to run its course, the agency would have existed at least until 31 December 2003. Accordingly, the agency was brought to an end about 12 months early (and, of course, the arrangement might have extended further, although for reasons set out below, I consider this an unlikely possibility). The court has the advantage of knowing the rate and the extent of the successful introductions that were effected as a result of the commercial relationship between the claimant and the defendant: Shell Malampaya in early 2000; The Aramco Berri Gas Plant (additional requirement) in the autumn of 2001; The Nanhai Project in the summer of 2002; The Bonny Island Project, Nigeria, phases 4 & 5 in the autumn of 2002; the Damietta Project April 2004; and indirectly, by way of roll-over, The Bonny Island Project, Nigeria,phase 6 in the autumn of 2004. Accordingly, over a period of roughly three years, PJV had been responsible for five successful introductions (counting Bonny Island as one introduction) and six orders. I am conscious of the importance of the first successful introduction that leads to a satisfactorily completed contract. Once a manufacturer has thus achieved a foothold in the market with a particular contractor, further opportunities may reasonably be expected to follow. In this regard, AIL was little known in the UK market before PJV’s efforts in 2002, and it faced the difficulty of all manufacturers based in Asia of persuading UK contractors of the quality of its product.

In my view by concentrating on the commission earned in 2003 and 2004 on two projects and thereby isolating Bonny Island and Nanhai, the claimant is distorting the true picture and as a result exaggerates the earnings which it might have gained during (the relevant) twelve-month period had it remained the defendant’s agent. The opportunities for PJV (successfully) to secure orders for AIL clearly existed, but this had not happened particularly frequently, and I am of the view that the – approximately – concurrent laying of orders on to AIL for the two high value Bonny Island and Nanhai projects was more of an exceptional event than the norm.

It seems to me that the fairest approach (and the one that is likely to produce the most proportionate result) is to approach compensation on the basis that over the twelve-month period to 31 December 2003, PJV (in the context of the distrust which existed between the parties) would have effected one further successful introduction (or roll-over) in fulfilment of its agency. I am satisfied that in order to achieve a fair result, given the deteriorating commercial relationship between the parties, I should not go beyond that period or conclude that more than one additional order would have been obtained. It seems to me unlikely that this professional arrangement would have continued after the end of the General Exclusive Agency Agreement, and PJV would inevitably have been concerned that any orders it obtained for AIL would not result in acceptable (or any) commission being paid. In the event, I consider they would have been cautious about expending time and effort on behalf of this manufacturer and the court should have well in mind the commercial realities of the situation: compensation should be assessed on the basis of what, on balance, would have happened during the relevant period. PJV had been let down repeatedly and seriously by AIL; as this action demonstrates, relations between them were at a very low point; and PJV would have had little, if any, confidence in AIL fulfilling its contractual obligations in the future.

The compensation to reflect this (lost) period should be calculated as the average of each of the six commissions listed below, on the basis of my conclusions, where relevant, as to how commission is to be determined. I accept that there is an element of “rough and readiness” in this approach (not least because PJV were never happy with the 2% they received for the Aramco Berri Gas Plant (additional requirement)), but I consider that by proceeding on the basis of the average of the actual commissions received for these various successful introductions, and proceeding on the basis of one further successful introduction or roll-over, the commercial realities of this (worsening) general agency arrangement will be reflected. I note that the payment of 2% rather than 5% for the Aramco Berri additional requirement has not been the subject of any claim in this trial. The relevant figures are:

Insofar as this involves a somewhat conservative approach from the claimant’s point of view (given that introductions had historically occurred, on average, at a rate of well over one a year and commission for the Aramco Berri additional requirement was only paid at 2%), I will allow for this by ordering that compensation should be paid on the gross rather than the net figure. For the reasons explained by Davis J in Tigana (Footnote: ⁸⁵) there is no established rule as to whether compensation should be assessed as a gross or net sum, and this will be a fact-dependent decision. Taking this approach would not, in my view, in those circumstances, provide the claimant with a windfall because it redresses the extent to which I have underestimated PJV’s opportunity successfully to obtain new orders in the 12-month period.

Before I leave this issue, it is necessary to mention further a part of Mr Godwin’s submission objecting to Mr Nash’s proposed formulation of the compensation claim, in which Mr Godwin argues that commission earned on the Nanhai project should be left out of the calculation because, on PJV’s own pleaded case, it was not a commercial agent in relation to Nanhai. The objection misunderstands the relevance of that project both to Mr Nash’s submission and to the approach I have adopted. The relevance of Nanhai is that it helps demonstrate the benefit which AIL was likely to have received if PJV had been allowed to continue its work under the general agency of introducing AIL to further projects. If Nanhai is excluded and compensation is calculated by reference, for instance, to Bonny Island alone, a false and unbalanced picture will result.

In the result, for its role as a commercial agent under the Regulations, PJV is entitled to compensation of US$ 118,518.60.

In the result, for:

the Bonny Island Project phases 4 & 5, PJV is entitled to 4.5% commission on orders worth US$ 6,352.819.05 = US$ 285,876.85

the Bonny Island Project phases 6, PJV is entitled to 4.5% commission on orders worth US$ 2,353,494.47 = US$ 105,907.24

the Nanhai Project PJV, is entitled to 3% commission on orders worth US$ 9,302,108.18 = US$ 279,063.24

the Damiettta Project, PJV is entitled to 5% commission on orders worth US$ 159, 375.00 = US$ 7,968.75

its role as a commercial agent under the Regulations, PJV is entitled to compensation = US$ 118,518.60

I will hear counsel as to any further directions or orders that may be needed on questions of interestand of costs.