Royal Courts of Justice
Strand, London, WC2A 2LL
Before:
MR JUSTICE AKENHEAD
Between:
ADS AEROSPACE LIMITED | Claimant |
- and - | |
EMS GLOBAL TRACKING LIMITED | Defendant |
Marc Rowlands QC (instructed by CJ Hough & Co) for the Claimant
David Head (instructed by Hogan Lovells) for the Defendant
Hearing dates: 2-5, 9-11 and 17 July 2012
Judgment
Mr Justice Akenhead:
This case relates to an agreement between the parties for the exclusive distribution of satellite tracking devices for aeroplanes or helicopters. Unfortunately, the relationship between the parties broke down some three years into the agreement and thus it is that the parties find themselves in litigation. The case raises interesting issues about repudiation, acceptance of repudiation by conduct, contractual interpretation and estoppel by convention and representation as well as promissory or proprietary estoppel.
Satellite Tracking
Satellite tracking devices are used in different applications: land, marine, personnel and aviation. Although the technology used in each market is similar, aviation is different because the devices have to be tested, certified and approved to demanding environmental standards. The aviation devices are accordingly more expensive than those for other applications although the light aircraft sector of the market is somewhat cheaper being less regulated than airline aeroplanes.
Any satellite tracking device requires two distinct functionalities. It needs to know precisely where it is and it achieves this in the same way that any "SatNav" device does, by comparing its position with the GPS satellite array. The GPS system was originally a US military system, but is now used by civilian markets. Russia has its own system, called Glonass, which does the same thing albeit using slightly different technology and different satellites. Secondly, it needs to be able to communicate that position to the end user. It does this by sending data to a satellite, which then forwards it to a ground station. This is the "Sat-com" element of the device. Depending on the level of sophistication of the technology in the device, and the level of service that the user has paid for, the data can range from one way, infrequent, short data bursts and more recently into voice and broadband transmission. From the ground station the data can be distributed to the end user in a number of ways, most commonly nowadays by web based applications.
There are two principal satellite systems providing worldwide sat-com coverage: Inmarsat and Iridium. Inmarsat was founded in 1979 as an inter-governmental organisation in order to provide a sat-com network for shipping. The satellites were launched in the early 1980s and are positioned in geostationary orbit (that is, 22,000 miles above the earth’s equator) and they travel at the same speed and in the same direction as the earth as it rotates on its axis; so from a specific location on the earth they appear to be stationary and effectively remain fixed in relation to any point on the earth’s surface. A small number of satellites can provide global coverage (with the exception of the Polar Regions). In the early 1990s the International Maritime Organisation stipulated that all ships over 300 gross tonnes were required to carry an Inmarsat terminal that could send position reports, distress and telex messages. Inmarsat defined the necessary standard for the terminal (known as the "Inmarsat C" standard). One of the companies that produced an Inmarsat C terminal was Thrane and Thrane ("T&T"), a Danish company: its product was called the "Maritime C" terminal, and it sold in significant numbers. T&T decided to design an equivalent product for the aeronautical market, called the "Aero-C. The Aero-C was first produced in 1993 and remained in production until 2008.
The Iridium satellite constellation, by contrast to the Inmarsat system, comprises 66 satellites in low earth orbit (typically at an altitude of around 500 miles above the earth’s surface). Iridium was conceived and launched by Motorola in the 1990s in order to provide mobile telephone services. In the event, other mobile phone service providers rapidly built base station networks in areas of high, and wealthy, populations: the Motorola model, although capable of providing mobile phone access globally (as opposed to having to be within range of a base station) was unable to compete on price, and was left with limited markets (oil exploration, disaster relief, search and rescue and military) which were insufficiently lucrative, and Iridium entered Chapter 11 bankruptcy protection in 2001, emerging in 2003. One of its main customers was and is the Department of Defence in the United States.
The respective merits and demerits of the two systems are the subject of much debate in the sat-com world, and indeed in this case, as the witness and expert evidence reveals. The principal points of contention are technical (coverage and availability) and political (because of Iridium’s connection with the US, and in particular the Department of Defence). Both systems (Inmarsat and Iridium) therefore started life with a particular market in mind. In Inmarsat’s case it was safety related maritime tracking, distress reporting and telex communication (that is, principally data communication). Iridium was initially intended to provide voice communication services for mobile phone users. In fact, both systems are now used to provide sat-com across the broad range of markets, that is: maritime, terrestrial, aeronautical and personal and in both data and voice. Iridium was until May 2012 unable to be used in Russia legally.
The end-user is the purchaser of a tracking device, called a terminal, which is installed on an asset (an aeroplane, a ship or vehicle) and enables the user remotely to monitor the status and location of the asset. Most end-users operate a fleet of assets, such as security companies tracking vehicles in the Middle East or fleet owners tracking their ships. The terminals, which are small pieces of hardware about the size of an A5 sheet of paper and about 5 centimetres deep, are fitted with GPS technology that enables them to communicate their position to orbiting satellites using radio frequency waves. The terminals are fitted with an operating script that enables the user to program the terminal for autonomous operation and set configuration parameters such as the rate at which messages are transmitted.
The satellite relays messages between terminals and an earth station that hosts the equipment cabinets owned by companies such as Satamatics Ltd ("Satamatics"), the former name of the Defendant. The antenna at the earth station is a large dish approximately 3 metres or more in diameter. An earth station converts the data to and from radio frequency signals suitable for transmission via satellite, and is the hub that communicates with the satellite, but it does not process user data as such. The earth station antenna is connected to a cabinet of electronics. The cabinet processes the messages received from, or to be transmitted to, the satellite. A number of cabinets can be connected to the same antenna and hence communicate with the same satellite. Each cabinet controls the air interface, which is the communication link between the satellite and the earth station. The cabinet uses the internet to send and receive the users' messages to Satamatics' data centres.
The data centres support the messaging applications through the temporary storage of user messages in both the send and receive directions. The data centres also support authentication and billing functions. Users access their data through web based application servers based at the data centre, or through their own application servers that connect to the data centre through a defined internet connection. The data formatted by the data centres is sent on to an internet application which the end-user can see on their computer. The application displays the messages sent from the terminal, including information on the location of the asset that it is fixed to. The end-user can also send messages from the application back to the terminal, using the same process but going the other way.
In order to access the satellites owned by Inmarsat or Iridium, companies such as Satamatics pay for airtime, which is effectively access to the satellite channels on the Inmarsat or Iridium network. The cost of obtaining access to the satellite network depends on how much bandwidth and power is required. There are a range of services providing different bandwidth and power; one of these services is the Inmarsat D+ service, which requires low bandwidth and low power. This makes it (relatively) low cost. Satamatics used the Inmarsat D+ service for the aeronautical tracking product that is the subject of this dispute. Having purchased airtime for the D+ service from Inmarsat, Satamatics passes the airtime costs on to its customers (in this case, ADS), with a mark-up, by billing them under a tariff system similar to those for mobile telephones: the higher the number of messages required, the higher the monthly airtime cost.
The Parties
Hans Karlsen is the founder and CEO of Airborne Data Services Limited and ADS (Aerospace) Limited, the Claimant in this action; I will refer to them both as “ADS”. He is an expert in the aerospace industry and in particular the market for satellite communications. He has a degree in aeronautical engineering and an MBA from Witwatersrand University, and his entire career has been spent in aviation. Between 1986 and 1993 he worked for Inmarsat, the first provider of a global satellite constellation for mobile communications. At Inmarsat, in 1993 Mr Karlsen sponsored the necessary regulatory and approval certification of the "Aero-C", produced by T&T; this had been developed as an aeronautical version of a marine tracking device. Having helped obtain the relevant approvals for the Aero-C, Mr Karlsen left in 1993 to set up Airborne Data Services Limited, in order to obtain Airworthiness Certification for the Aero-C and to become a distributor for T&T, particularly for the Aero-C product.
By 2003, it was becoming apparent that the Aero-C, although an important product in the aerospace tracking market, was starting to become technically outdated, and Mr Karlsen decided to explore the possibility of producing a new product to exploit the growing demand of the “Aerial Work” sector of the aviation market (and in particular helicopters) for satellite tracking devices. This led to a meeting, in early 2004, with Satamatics, which produced satellite tracking devices for land, marine and personnel tracking, and sold airtime to the users of those devices on the Inmarsat network. This contact eventually led to the "Satamatics Exclusive Distribution Agreement" ("the Agreement"), executed by the parties on 20 December 2005, by which Satamatics was to produce the satellite tracking product that the parties had by then jointly developed (known as the SAT-111) and Airborne Data Services Limited was given exclusive worldwide distribution rights for an (automatically renewable) 5 year term. Mr Karlsen later decided to take advantage of a government initiative designed to assist small companies in the technology sector, only open to companies incorporated within 3 years of making the loan application. On 7 December 2006 ADS Aerospace Limited was incorporated and was granted a loan by Barclays Bank on 4 May 2007. On 4 April 2007 the Satamatics Exclusive Distribution Agreement was novated to ADS Aerospace Limited. Essentially both of Mr Karlsen’s companies comprised him and his wife Marjorie. Airborne Data Services was dissolved in 2010.
Satamatics was a start-up company set up by a company called TRL Technology Limited in 2001. Its primary market was in satellite tracking devices and in particular the land and marine-based devices. At some stage in 2004, it was acquired by a number of what were described as "high net worth individuals". It launched its global Inmarsat D+ service in August 2001 and gained a wide range of licences in 2003. In 2003 it launched its new "SAT-101" satellite terminal device for land and marine services. In June 2005 it put on the market a lower cost device called the "SAT-201" for the same application. It incurred year on year losses at least up until about 2008. In 2009 it was acquired by EMS Technologies Inc and changed its name to EMS Global Tracking Ltd and in August 2011 EMS Technologies was acquired by Honeywell. During the course of Satamatics’ relationship with ADS, it employed a relatively few number of employees, in the region of about 30. Its engineering director was Mr Hatherall; its CEO was Mr Chisholm until April 2008 when Mr Koutrouki, the former Chief Financial Officer, succeeded to that role.
The SAT-111
The SAT-101 was the first terminal developed and manufactured by Satamatics. It was developed in 2002-3 when Satamatics was still a new company, and it went on the market in 2003. The SAT-111, which is the subject of this dispute, is an aeronautical version of the SAT-101 It was developed for tracking land and marine assets such as cars, trucks and ships. It could send and receive messages and provide information as to its location. The main module of the SAT-101 unit was a low-cost plastic enclosure containing a printed circuit assembly ("PCA") which incorporates an electronics printed circuit board ("PCB") assembled with electronic components (together the “101-board”). The main module had several interfaces, which could be connected to other devices such as switches and sensors. The terminal could then be used remotely to control or monitor those other devices. The module could be powered from a supply of 9.6 volts to 32 volts or from a battery pack. There was also an antenna in a separate plastic enclosure to the main module, which contained the antenna itself, known as the “patch”, together with a high power amplifier (“HPA”) for transmission and a low noise amplifier (“LNA”) for reception. Both the HPA and the LNA had to be in close proximity to the patch antenna to minimise signal losses and provide acceptable performance.
In order for a terminal to use the Inmarsat D+ network, it had to have Inmarsat Type Approval. This was effectively an acceptance certificate from Inmarsat, which required terminals transmitting on its network to be checked and certified to ensure that nothing would damage the network and satellites or cause interference to Inmarsat's other satellite services. The SAT-101 unit obtained Inmarsat Type Approval before it went on the market in 2003. The SAT-101 was purchased by customers requiring tracking and messaging services for land vehicles and ships. For example, a significant market for the SAT-101 was truck companies in South America.
Satamatics predominantly marketed the SAT-101 using distributors and value added re-sellers (“VARS”) who would sell the SAT-101 and the accompanying airtime to end-users, adding a mark-up to what they paid Satamatics to make a profit. VARS, however, would often sell the terminal and airtime together with access to their own internet application. In the early days of Satamatics, it did not have its own application and so it had to sell hardware and airtime to VARS that could provide the end-user with an application.
Satamatics was first approached by Mr Karlsen of ADS in around late 2003 or early 2004. At this point, Satamatics was still in its infancy and not yet making a profit. ADS wanted to develop a satellite tracking terminal for the aeronautical market, using the Inmarsat satellite system. Mr Chisholm held the initial discussions with ADS. Mr Hatherall became involved some months later from the engineering side. Satamatics had no experience at all of the aeronautical market; its products were developed for tracking and monitoring land and maritime assets. The intention was to combine ADS's knowledge of the aeronautical market with the technology that Satamatics had already developed in order to produce a new aircraft tracking device. The background to the development of the SAT-111 was reflected by Mr Chisholm in an email dated 22 May 2006 explaining that Satamatics had relied on ADS's "market knowledge" and setting out how the SAT-111 had evolved.
As Mr Karlsen was familiar with the aeronautical market, and had a technical background, he and Mr Hatherall worked together to develop the new aircraft tracking device. They had initial discussions and e-mail exchanges aimed at defining the requirements and allocating development responsibility between ADS and Satamatics and they agreed that Satamatics would develop the electronics and ADS would provide cabling, antennas and installation services. The antenna selected was made by Sensor Systems and was designed to sit on the outside of the aircraft.
Because the antenna did not house the necessary electronics, these were to be provided by Satamatics who used the HPA and LNA from the SAT-101. It was agreed with ADS that a plastic enclosure was not suitable for the aero environment where expectations were for more rugged equipment. A milled aluminium metal enclosure was selected to encase the HPA and LNA electronics. It would sit very close to the antenna but inside the aircraft. This box became known as the "HPA" also. Satamatics also developed the main module containing the 101-board and suitable switches and connectors, which would sit in the cockpit of the aircraft and which also required a milled-out aluminium enclosure of its own. This main module became known as the Satellite Data Unit ("SDU").
The whole SAT-111 terminal therefore consisted of three separate parts: the SDU, housing the 101-board, and located in the cockpit (supplied by Satamatics), the HPA located inside the aircraft but near the antenna (supplied by Satamatics) and the Sensor Systems antenna (sourced by ADS and located on the exterior of the aircraft). Satamatics would sell the SAT-111 unit to ADS. ADS would add the Sensor Systems antenna and cabling, which were sourced by ADS, to the SAT-111. The whole package (SAT-111, plus antenna and cabling) was called the ADS-100. ADS was to install the units in the aircraft. The end-user web based application was provided by Satamatics and was a version of Satamatics' standard application branded for ADS; that is, Satamatics' logos etc were replaced with those of ADS. The application provides the user with messaging and tracking facilities and shows a map view of the location of their assets. Satamatics also included "Doppler compensation" in the SAT-111, which was not required for the SAT-101. Doppler compensation takes into account the fact that aircraft are travelling at high speeds, which means that the frequency of any waves emitted from the aircraft, such as the radio waves by which the SAT-111 transmits messages to the satellites, is affected. Without Doppler compensation, the transmission of messages would not be reliable above certain speeds.
Manufacture of the SAT-101 and enclosures was subcontracted to third parties and one of those subcontractors was responsible for the final assembly of the SAT-111. Although the electronics behind the SAT-101 and the SAT-111 were almost identical, Satamatics had to obtain a separate approval for the whole SAT-111 system from Inmarsat because the SAT-111 used a different antenna. In addition to Inmarsat Type Approval, equipment like the SAT-111 has to be "CE" marked in line with applicable European Directives; this confirms conformity with the necessary (European) safety requirements and that the system will not interfere with or suffer from interference from other electronic devices. Also D0-160D approval was required. D0-160 testing involved a specification set by the Radio Technical Commission for Aeronautics. The standard test applicable to the SAT-111 at the time was D0-160D, although it has later been revised. In order to obtain D0-160 approval, a unit had to be taken to a test house so that it could be tested. This enables the manufacturer to prepare a Declaration of Design and Performance (“DDP”) which set out what tests have been undertaken on the unit and confirms that the unit has passed those tests. Before the unit is then installed on an aircraft, the installer would review the DDP to check that the item had passed the test requirements applicable to that type of aircraft.
Satamatics produced two prototypes of the SAT-111 unit in May 2005, although Mr Hatherall had been discussing the requirements and design with Mr Karlsen since early-2004. I accept Mr Hatherall’s evidence that in practice, as the first working model, a prototype gives an early indication of a potential product. It is used to demonstrate feasibility, to identify whether any alterations are required, and to enable tests to take place. Even minor changes to the electronics of a product require a level of re-testing and can lead to further significant changes having to be made to the unit. A prototype is produced before the product is formally tested and certified, and as such it is not and should not be provided to end-users unless in limited quantity for testing purposes only. Indeed, there are often regulatory prohibitions on selling a product without the necessary approvals.
At ADS's request, Satamatics sent the two prototype SAT-111s to Helog Lufttransport KG ("Helog") at the beginning of June 2005. Helog operated helicopters in Sudan for the UN and had agreed to test the SAT-111 and provide feedback on its performance. The SAT-111 prototypes were not production units and it was intended that they would be swapped once fully tested production grade units were available (which understanding was reflected in Satamatics’ Oliver Hilton's email to Mr Karlsen on 22 May 2006). Mr Karlsen also acknowledged that these were prototypes and that they were not tested as comprehensively as full production units, as set out in his email to Helog on 22 May 2006. Between producing the prototypes and finalising the production grade SAT-111 units, both the hardware and the messaging script was altered. Once the production grade units were finalised, the product was still not fully-fledged as it required Inmarsat Type Approval (which was obtained on 5 August 2005) and had to undergo D0-160D testing: this was completed at the beginning of March 2006.
The SAT-201
This was a new tracking device introduced in 2005 by Satamatics for land and marine use and, unlike the SAT 101, it was housed in a single unit, albeit with some similarities. The SAT-201 comprised a modem board and an active antenna board. It complied with up-to-date requirements.
The Satamatics Exclusive Distribution Agreement
The Agreement dated 20 December 2005 contained the following preambles:
"Whereas;
(A) Satamatics and ADS have jointly developed the SAT-111 Product,
(B) Satamatics manufactures the SAT-111 Product as herein defined and supplies the Airtime Service (as defined below),
(C) Satamatics and ADS have agreed to enter into an agreement subject to the terms and conditions hereinafter defined, whereby Satamatics appoints ADS as it is exclusive worldwide distributor for the SAT-111 Product and any future derivatives thereof."
Clause 1.1 contained definitions:
" 'Airtime Service’ means the supply of transmitted and received messages and acknowledgements and all other associated messages for the operation of the Terminals on the Satamatics D+ Satellite Network;
'Price List' means the current prices for SAT-111 Product, or any subsequent derivatives, and Airtime Service as specified by Satamatics from time to time;
'Product' means the SAT-111 high power amplifier (HPA) and satellite data unit (SDU), any subsequent derivatives, (including any part or parts thereof) manufactured or supplied by Satamatics;
'Specification' means a specification for the Product set out in the Satamatics installation manual, operating manual, certificate of conformity, declaration of design and performance documents (DDPs), as amended from time to time;
'Term' means the period of 5 years commencing on the date of signature of this Agreement by Satamatics and renewing the subsequent 5 years unless terminated earlier in accordance with the terms of this Agreement…"
Clause 1.3 stated that the “attached Schedules and recitals form part of this Agreement”, albeit that the Agreement prevails in the case of any conflict.
Clause 2 states:
“2.1 Satamatics grants ADS exclusive distribution rights to the SAT-111 for resale on a worldwide basis and to supply the Airtime Service for the Term subject to the terms and conditions of this Agreement…
2.3 Satamatics shall have the right to propose to ADS, dealers/distributors in territories that may help generate sales of the SAT-111 Product. ADS, at its sole discretion, may or may not accept such proposed dealers/distributors."
Clauses 3 and 4 provided as follows:
“3.1 Satamatics agrees to supply the SAT-111 Products to ADS in accordance with ADS’ orders.
3.2 Satamatics shall not be under any obligation to continue the manufacture of all or any of the SAT-111 Product, however, should Satamatics cease to manufacture the SAT-111 Product, Satamatics will provide ADS 12 months' advance notification of its intention to cease manufacture and will licence to ADS, under mutually agreed terms, the right to continue with the manufacture of the SAT-111 product. Neither Party shall be entitled to make alterations to the Specifications of the Product without the prior written consent of the other Party.
3.3 Each order for the SAT-111 Product shall constitute a separate contract. Any default by Satamatics in relation to any one order shall not entitle ADS to treat this Agreement as terminated, unless such default is not cured within a reasonable period of time, not to exceed 30 days.
3.4 ADS will give Satamatics not less than 3 months’ written notice of its estimated requirements for the SAT-111 Products for each month, and must promptly notify Satamatics of any changes in circumstances that may affect its requirements.
3.5 The Conditions of Sale contained in Schedule 1, shall apply to all sales of the SAT-111 Products to ADS pursuant to this Agreement. Satamatics must give to ADS notice in writing of any change in the Conditions of Sale not less than one month before the change takes effect for the purposes of this Agreement.
4.1 ADS will be responsible for the exclusive distribution, marketing, sales and support of the SAT-111 Product.
4.2 ADS will be responsible for the sourcing and provision to its Customers of the antenna, PDA’s and all cables necessary for the Customer’s use of the SAT-111 Product.
4.3 ADS will resell the SAT-111 Product and Airtime Service to its Customers at such prices as ADS determines.
4.4 ADS will maintain such stocks of the SAT-111 Products as may be necessary to meet potential Customer requirements ”.
Clause 9 was headed “Warranties and liability” and provided, as follows:
“9.2 In the event of any breach of Satamatics’ warranty in clause 9.1 [as to satisfactory quality and compliance with specification], whether by reason of defective materials, production fault or otherwise, Satamatics’ liability shall be limited to repair or replacement of the products in question, or at Satamatics’ option, repayment of the price where this has been paid.
9.3 Notwithstanding anything to the contrary in this Agreement, Satamatics shall not, except in respect of death or personal injury caused by the negligence of Satamatics, be liable to ADS by reason of any representation or implied warranty, condition or other term or any duty at common law, or under the express terms of this Agreement, for any consequential loss or damage, whether for loss of profit or otherwise and whether occasioned by the negligence of Satamatics or his employees or agents or otherwise, arising out of or in connection with any act or omission of Satamatics relating to the manufacture or supply of the Products or the Airtime Service, their resale by ADS or their use by any Customer”.
Clause 10 provided for termination by either party for material breach or for specified events such as liquidation or arrangements with creditors but contained additionally these two sub-clauses:
“10.1 Subject to clause 9, the following provisions set out the entire liability of Satamatics…to ADS in respect of:
10.1.1 any breach of these conditions; and
10.1.2 any representation, statement or tortious act or omission including negligence arising under or in connection with the Contract…
10.5 The rights to terminate this Agreement given by this clause shall be without prejudice to any other right or remedy of either party in respect of the breach concerned, if any, or any other breach.”
Clause 13 contains material clauses:
“13.1 The attached Schedules form an integral part of this Agreement…This Agreement expresses the entire Agreement between the Distributor and Satamatics and supersedes any negotiations or prior Agreements on its subject matter…
13.4 This Agreement shall not be modified in any way except by a written instrument signed by both parties.”
Schedule 1 to the Agreement set out the conditions of sale for the Products. Relevant terms were:
“3.3 Any dates specified by Satamatics for delivery of the Products are intended to be an estimate and time for delivery shall not be made of the essence by notice. If no dates are so specified, delivery will be within a reasonable time.
3.4 Subject to the other provisions of these conditions Satamatics will not be liable for any direct, indirect or consequential loss (all three of which terms include, without limitation, loss of profits, loss of business, depletion of goodwill and like loss), costs, damages, charges or expenses caused directly or indirectly by any delay in the delivery of the Products nor will any delay entitle the Distributor to terminate or rescind the Contract unless such delay exceeds 90 days…
6.1 Unless otherwise agreed by Satamatics in writing the price for the Products shall be the price set out in Satamatics’ price list published on the date of order….
7.1 Unless credit terms are agreed in writing by Satamatics, payment of the price for the Products is due on delivery…
Schedule 2 dealt with the conditions applicable to the "Supply of Airtime" and these included a charging regime for such services.
A number of conclusions, by way of interpretation of the Agreement can readily be drawn:
(a) It was not a partnership in any legal sense because the parties did not share liabilities or income. Although intellectual property was shared, in essence Satamatics was simply undertaking to manufacture and supply SAT-111 Products or any "derivative" and ADS was agreeing to pay for what it ordered. ADS was not as such the agent of Satamatics.
(b) Clause 3.1 of the Agreement makes it clear that Satamatics’ obligation to supply is dependent upon receipt of an order or orders from ADS. There is no obvious obligation on the part of Satamatics to keep stocks of SAT-111. In the absence of specific agreement about delivery dates, the obligation on the part of Satamatics is to supply within a reasonable time of the order. It was however the obligation of ADS to maintain necessary stocks of the SAT-111 to meet potential customer requirements. It is clear however from the wording that it was envisaged that Satamatics would or at least was entitled to manufacture to order. Delivery times therefore might legitimately be dependent on a reasonable time for manufacture.
(c) Clause 3.4 of the Agreement requires ADS to give Satamatics three months' notice of its estimated requirements. Although this was in fact more honoured in the breach than in the observance, it provides a pointer to the contractual appreciation that the Products were likely to have to be manufactured and that the parties appreciated that three months notice in this regard was a sensible idea.
(d) Satamatics was not under any obligation to continue with the manufacture of the SAT-111 provided that it gave ADS 12 months' advance notification of the intended cessation of manufacture. If cessation happened, ADS was to be given, if it so wished, a license itself to continue with the manufacture of the SAT-111 product.
(e) There is no contractual definition of what the term "derivative" means. It certainly was intended to mean at the very least a product which was "derived" from the SAT-111. Counsel rightly accepted that essentially it was all a matter of fact and degree as to whether a further product was a derivative of the SAT-111. One will need to look at the similarities or differences as the case may be, primarily of functionality and concept as between the SAT-111 and the other product.
(f) There is no contractual obligation on the part of Satamatics to produce a derivative but it is clear and logical that a derivative could emerge for any number of reasons. For instance, it could emerge as a result of Satamatics’ own initiative or of prompting by ADS. It could arise because a key element within the SAT-111 had become redundant or proved inadequate in service and a new type of element was required to replace it.
(g) However, from the contractual definition of ‘Product’, something can only become a derivative once it can be said to be "manufactured or supplied by Satamatics". Put another way, something does not become a derivative, say, just because the new product is being discussed or even designed. It will be a matter of fact, primarily, to determine whether the actual or possible new derivative "Product" has got to a stage where it can effectively and without more development work be manufactured or supplied by Satamatics.
Various issues arise between the parties in relation to the limitations of liability contained in Clauses 9.3 and 10.1. Considering, first, Clause 9.3, it is clear that the wording is not particularly clear in referring to liability to ADS "by reason of any representation or implied warranty, condition or other term or any duty at common law, or under the express terms of this Agreement"; commercially construed however, it must relate to misrepresentation or breach of contractual or common law duties. What is excluded however is liability "for any consequential loss or damage" and an example of this is given as "loss of profit". However, loss of profit does not define "consequential loss or damage" it is simply a type of consequential loss or damage. There is a slight clue in the word "occasioned” which follows; "occasioned" has a broader connotation than "caused". The word consequential is used in Clause 3 of Schedule 1 as excluding liability for "any direct, indirect or consequential loss" relating to delay; that clause recognises, globally, the difference between direct on the one hand and "indirect" or "consequential" loss "caused directly or indirectly" by delays. In my judgement, the word “consequential” in Clause 9.3 clearly means something other than "direct".
There is some authority for the proposition that "indirect" or "consequential" loss is often to be construed as loss or damage which falls within the second limb of Hadley v Baxendale, although each contract needs to be construed on its own terms. However, parties who draft contracts which are subject to English law can be taken to appreciate the difference between the two limbs. In this case, I have no doubt that, properly interpreted, Clause 9.3 is simply excluding that type of loss which falls within the second limb. If it was intended to exclude effectively all loss, the word "consequential" is unnecessary. One can assume however that it was put in there for a purpose which was to explain to the reader that direct loss was not being excluded but more remote loss which might be occasioned by the breach in question was being excluded. Mr Head for the Defendant sought to argue that that loss of profit on sales attributable to a refusal to supply the goods was "consequential" and within the second limb in any event. That is wrong in my view because the whole purpose of the exclusive distribution agreement was distribution and onward sale by ADS to customers and it must have been within the reasonable contemplation of the parties that a wholesale refusal to supply the goods would result in the inevitable loss of profit on those onward sales. Such loss therefore is not "consequential"; it is direct and firmly within the first limb of Hadley v Baxendale.
Turning to Clause 10.1, looking at the words used only in that sub-clause, superficially the provisions for mutual termination rights in Clause 10 ("the following provisions") represent "the entire liability" of Satamatics. That in itself is somewhat odd because Satamatics can terminate for breach by ADS. Taken literally, this is a very extreme clause. Although it is said to be subject to Clause 9 (and in particular Clause 9.2 whereby Satamatics’s liability for unsatisfactory quality or breach of specification is limited to repair or replacement or repayment of any price paid), a wholesale refusal to supply goods can only be met (if the Defendant is correct in its argument) by a termination for breach which leaves ADS without a remedy, for instance for sums paid for goods which have not been delivered. Of course, if that is what the parties really intended, they can legislate for that but the wording must be clear. The wording here is not clear because Clause 10.5 then throws open the door by saying that the termination rights are "without prejudice to any other right or remedy…in respect of…any…breach". What that is saying in effect is that the parties’ rights in relation to other breaches are and remain open and unrestricted. That is subject to Clause 9.2 relating to defects for which the liability remains limited as set out in that sub-clause.
The History
The reality is that ADS were unable to sell any significant number of the SAT-111 (or ADS-100) devices. Between the date of the Agreement in late 2005 and April 2008, only 17 were sold, mostly to Helog and a German company called FAI; in addition, two prototypes were provided to customers. This was not attributable to any default on the part of Satamatics but it was essentially attributable to the fact that it had limited appeal in the market, largely because of price. Many potential customers preferred to use the cheaper land-based versions, albeit that they were not accredited for aeronautical use. These sellers were known colloquially as "box shifters". In the spring of 2007, ADS lost its main customer, Helog, in an acrimonious way, albeit Mr Karlsen ultimately accepted that this was not attributable to Satamatics. By the end of 2007, ADS had "given up on Africa" which had been a prime focus of ADS’s sales efforts. There is no doubt that throughout most of the period 2005 to 2008 Mr and Mrs Karlsen were enthusiastic and optimistic about the potential for sales of the ADS-100. For instance, as early as August 2005, ADS was anticipating sales of 100 or more in 2006. Again, it is also clear that between them they made major and extensive efforts to sell the ADS-100.
One problem which did emerge, but which was not the cause of the poor sales, was that a European Union Directive, the Restriction of Hazardous Substances Directive 2002/95/EC (“the RoHS Directive") took effect on 1 July 2006. This restricted the use of six substances, including lead, in new electrical and electronic equipment. Parts of the 101-board (and therefore parts of the SAT-111) were manufactured using a lead-based solder, which would not comply with the RoHS Directive. Moving to lead-free solder also had the effect of making certain components obsolete. While Satamatics could have developed a RoHS-compliant version of the 101-board, this would have meant a substantial (and thus costly) re-design. Satamatics and ADS were aware of the RoHS Directive before it came into force and before the SAT-111 development was fully complete. However, this was not seen as a reason to delay or divert the design and development of the SAT-111 because as was hoped at the time if ADS was successful in marketing and selling the ADS-100, then in order to keep supplying ADS with SAT-111s Satamatics could and would re-design the SAT-111 to ensure it was RoHS-compliant. By the end of February 2006, it was resolved internally within Satamatics that the RoHS Directive did not apply to aircraft applications and therefore did not impact upon production or sales of the SAT-111. However, SAT-101-boards (with the lead solder) would have to be sourced and retained in sufficient numbers to satisfy orders for the SAT-111.
The impending impact of the RoHS Directive coming into force had led to the design, development and manufacture of the SAT-201 and units were in production by June 2005. The SAT-201 provided a lower level of functionality compared to the SAT-101 (and was cheaper as a result), but for end-users wanting the same level of functionality in the SAT-201 as in the SAT-101, Satamatics developed an additional unit called the GEM-100. The GEM-100 was designed to operate with the SAT-201 to provide the full spectrum of functionality offered by the SAT-101. The GEM-100 and SAT-201 had the same mounting arrangement and almost identical form factors to the SAT-101 main unit and SAT-101 antenna respectively, which made it easier to replace SAT-101s that had already been installed with a SAT-201 plus GEM-100. A Technical Report for the Satamatics Board meeting of 8 February 2006 stated:
"[to] meet the RoHS requirements the SAT-111 will need to be redesigned using the SAT-201 and GEM-100. This doesn’t present any technical difficulties but the aeronautical approval testing will have to be repeated at a cost of £20,000."
The issue of RoHS compliance was discussed in several internal meetings at Satamatics, because it was felt important to decide how many more 101-boards were needed to be produced before 1 July 2006 so that Satamatics had adequate stocks for those customers requiring SAT-101 components. Satamatics personnel also discussed how the 101-boards would be allocated to customers. Satamatics considered that it could not keep manufacturing 101-boards in their current iteration for use in SAT-111 units because several of the components were obsolete or no longer available. If ADS had obtained orders for large numbers of SAT-111 units, then Satamatics was committed to design, develop and produce a RoHS-compliant version of the 101-board for use in the SAT111. However, Satamatics was not prepared to produce a RoHS compliant version if there was no firm likelihood of significant sales of SAT-111 units; what it was prepared to do was to set aside what seemed to be more than enough 101-boards exclusively for ADS so that, should ADS order any more SAT111s, Satamatics would be able to fulfil those orders.
On 14 February 2006, Mrs Karlsen emailed Mr Chisholm, the Chief Executive of Satamatics,:
"…Matthew Carlton [of Satamatics] told us that the SAT-101 was coming to the end of its life and we would have to advise him of how many boards we would require for SAT 111. Matthew implied that he would need a financial commitment from us to secure the boards as the supply was limited and he was reserving boards for other customers. This came as a bit of a surprise to us…We recognise that the ROHS requirement is driving the need for a new board and that a new derivative of SAT 111 needs to be developed. After giving this some thought, I believe it would make sense if we revised the distributor agreement to state "aeronautical products" rather than SAT 111 or any derivatives…"
Mr Chisholm replied the following day;
"Actually although the SAT-101 is becoming obsolete we are replacing it with a similar type product. The functions that are in the SAT-101 will be provided by the SAT-201 plus a new product GEM-100…The SAT-101 will be obsolete in its current form because of 2 reasons: 1) some parts are obsolete and would need designing out, 2) a European Directive bans electronic parts that contain lead from end of June 2006. This means we can't manufacture beyond this date and we cannot sell inside Europe beyond this date. We can sell outside Europe if the product is already manufactured or is already in the sales chain. This is why Matt was looking to have a commitment for SAT-101 parts to put into SAT 111"
By the end of February 2006, it was resolved internally within Satamatics that the RoHS Directive did not apply to aircraft applications and therefore did not impact upon production or sales of the SAT-111. However, SAT-101-boards (with the lead solder) would have to be sourced and retained in sufficient numbers to satisfy orders for the SAT-111. This was because the SAT-101-boards were sourced within Europe.
At about this time, plans had been put in place to design what was called the SAT-221 which was the combination of the SAT-201 and the GEM-100. Indeed, by mid May 2006 some preliminary design work had been done. This version of the SAT-221 which was intended to replicate with non-obsolete parts the SAT-111 was not taken any further. It is not to be confused with the later version of the SAT-221 which was to emerge as a prototype in mid-2008.
The two SAT-111 prototypes produced by Satamatics were installed in the latter half of 2005 and proved to work well. They were replaced by standard production units later in the year. 2006 proved to be the best year for sales with 10 SAT-111s supplied to and sold by ADS. Although not envisaged by the agreement, ADS paid deposits on 10 SAT-111 units in advance in March 2006; this reflects at least in part ADS’ wish to secure such units. At around this time, Mr Karlsen had some e-mail contact with a Russian gentleman, Mr Boreiko, of a Russian organisation called Business Navigator Ltd about the possible supply of units for helicopters in Russia. This communication ceased in April 2006 and came to nothing.
There was and appeared to be a reasonably good working relationship between ADS and Satamatics. For instance Mr Karlsen e-mailed Mr Hatherall on 17 May 2006 suggesting a SAT-201 enclosed in a SAT-111 box as a cheaper system possibly for the Australian, New Zealand and UN markets. Mr Hatherall replied: "not a problem technically". But this came to nothing also however. Some frustration was creeping into the relationship, largely due to the fact that sales were not taking off. Mr Chisholm felt that he had "lost the plot" in his e-mail of 22 May 2006 to Mr Karlsen; he started from a position that Satamatics had no knowledge of the aeronautical industry and was relying on ADS and was concerned at the possibility of having to produce a further tracking device. Mr Karlsen smoothed things over in his reply saying that he and his wife were working "7 day weeks" and were "gaining a lot of interest". Mrs Karlsen in her e-mail in response said that Mr Chisholm’s e-mail was "below the belt" saying "we have bet our future on this product and have sunk a lot of our personal resources into it and after today, I feel that it is slipping away." This verbal spat was, however, resolved amicably.
There followed however an example of Mr Karlsen pushing the boundaries at least with potential customers. On 12 June 2006 he wrote to a Mr Marre of the World Food Programme saying that ADS had "decided to go ahead with the development of the cheaper ADS-200 entry level system, which does not have the functionality of the ADS-100, but uses the same aeronautical antenna." He actually prepared an "Avionic Specification" for the ADS-200 at this time although it was not in production and had not even been designed let alone approved by Satamatics. This assertion was simply misleading and it highlights that he was prepared to promote a product as if it was in development when it clearly was not. Although the Avionic Specification was sent to Satamatics at this time, Mr Hatherall made it clear that no decision to proceed had been made.
In July 2006 the possibility arose of providing 40 SAT-111s to a Spanish customer. Mr Karlsen was prepared to offer a reduction to his potential customer for a bulk order, which is perhaps not surprising; he asked for and obtained the offer of a comparable reduction per unit for such a large order from Satamatics. He suggested changes to the electronics but Satamatics was reluctant to change them. No order was secured. Later in August and November 2006, at Mr Karlsen's request Satamatics offered a discounted price to particular clients.
In October 2006, Mr Karlsen told Mr Hatherall that his sales forecast for SAT-111s was that there was "a very high probability that he will require a further 50 units and optimistically this could increase to 80 units”, this being recorded in his internal e-mail on 27 October 2006. There is little or nothing in the disclosed documents at this time which justified any probable or indeed any possible sales approaching anything like these numbers.
On 21 November 2006, Satamatics’ Board received a technical report to the effect that the "SAT-201/GEM solutions will be deployed once stocks of SAT-101 have been depleted (probably early in the New Year)". The GEM-100 was in the process of being developed. The boards were not so depleted.
On 28 March 2007, the newly formed ADS in its application to the DTI for a loan indicated that in its newly formed status it has been working together with Satamatics over the previous two years (which, as such, was not correct because it was only incorporated in 2006). It also referred to looking at future Research and Development "to develop the next generation system". There had been little or no discussion with Satamatics over the previous nine months about the development of such a system.
By 29 May 2007, Mr Karlsen was reporting that ADS was "getting a lot of interest from Russia" and that ADS had “already submitted several quotations". Projects said to be those for which ADS was bidding were in Moldavia and "Krysakstan". There was no disclosure of any such bids or quotations and the fact that Mr Karlsen did not know the name of the second country in which he was supposedly bidding suggests that the quotations were at best oral and in any event certainly informal. Mr Chisholm replied suggesting that Russia was "a big issue" but that he could provide an introduction to Satamatics's partner who had a relationship with the main satellite licence holder in Russia. History does not relate that these quotations or the interest from Russia were furthered; certainly they came to nothing.
Mr Chisholm asked ADS why there were such low sales. The answer on 20 July 2007 was the presence of box shifters. Mrs Karlsen wrote ruefully: "it seems we underestimated how many serious operators that are out there compared to the cowboys". However, she said that ADS remained committed and appreciated Satamatics’ commitment; she and her husband had recently re-mortgaged their house "to keep going".
During the latter part of 2007 Satamatics upgraded its network from the Inmarsat-D+ service to support the Inmarsat-D2 service (called ISAT M2M, Enhanced D+, or D2), which provided substantially quicker position reporting delivery times and the opportunity to significantly increase the reporting rates of the SAT-101 and SAT-201 from once every 2 minutes to once every 30 seconds (4 fold increase), as well as to increase the size of the message sent from the mobile terminal from 84 bits to 204 bits. The majority of existing D+ terminal firmware could be upgraded to D2. Also the time to first transmission was reduced from approximately 6 minutes when using D+ to approximately 1 minute when using D2.
During 2006 and 2007 it was becoming apparent that the Aero-C system would become obsolete within a few years and there was no indication that T&T would produce a substitute. It seemed to Mr Karlsen that T&T’s priority was to get into the more complex voice and data aeronautical systems that made use of their maritime technology. As a result, Mr Karlsen perceived that a market opportunity might be emerging to develop an Aero-C substitute. Since Iridium was excluded from Russia, he thought that there was also an increasing demand for an Inmarsat based aircraft tracking solution. Satcom1 (a Danish company dealing in satellite airtime) was working with Scandinavian Avionics, who had extensive experience with Aero-C in the CIS (the Russian related Commonwealth of Independent States). Satcom1 approached Mr Karlsen and encouraged him to start discussions with Scandinavian Avionics to serve the Russian air transport market. Since he believed that ADS had the only viable aeronautical tracking product that could be a substitute for Aero-C, he felt that ADS had an ideal opportunity to work with Satamatics and Scandinavian Avionics to access the Russian market.
In November 2007, Karina Larsen (the CEO of Satcom1) was considering a substitute for Aero-C and she sent an email to the managing director of Scandinavian Avionics, Mr Truelsen and Mr Karlsen on 21 November 2007, about the ADS-100 system stating:
"I am putting you two direct together. Hans can explain exactly what can be done and approvals. Satcom1 has seen this system and is in favour of it towards an Aero-C replacement since Thrane soon is out. Hans direct: + 44 1344 750047
We could meet at Scan. Av in very near future. Hans has been with Satcom1 at our office in Paris and done a full demo of system."
Mr Karlsen emailed Mr Truelsen some information on the SAT-111 and on 22 November 2007 Mr Truelsen replied:
"Tks, looks interesting. Can you pls. provide a system budget price. How is your dist. System? SA sell quite a lot of Aero-C systems (Russia biggest market) and might probably switch this in as a replacement."
During November and December 2007 ADS had discussions with Scandinavian Avionics relating to the technical and supply issues of the SAT-111.
By 11 December 2007, Mr Karlsen was suggesting to Satamatics that he believed that ADS should target Russia, the Gulf Region and the European Union. He wrote to Satamatics that ADS was "currently negotiating with [the company that is doing the installations in Russia] to select ADS-100". This was an exaggeration because, although there were some discussions with Scandinavian Avionics, these were not negotiations.
By the end of the year, internally, Satamatics was recognising that it had "very limited capability to offer SAT-111 moving forwards as it was based upon the SAT-101 (vis-a-vis stock and RoSH compliance)", as set out in Mr McQueen’s e-mail of 13 December 2007, at which time it was understood that it had no plans to develop the SAT-201 and GEM-100 equivalent which had been spoken about some 18 months before.
On 10 January 2008, T&T issued a formal "Last buy notice" that the Aero-C system was to be phased out and stocks would run out in mid-2008. In fact stocks did not run out for several more years and Aero-Cs continued to be sold.
On 15 January 2008, Satamatics had a review meeting and Mr Hatherall reported that ADS had called for two more SAT-111 units. It was recorded that "Moving forward, a business case will be required to migrate to SAT-201". This reflected a concern that the SAT-111 sales had not been good.
On 22 January 2008 Mr Karlsen e-mailed Satamatics stating that ADS was "working with a [sic] Russians to get the SAT-111 system approved, which will be very good for sales if we do it right. I have an important meeting on Thursday to sort this out." This was not then correct as he was not working with Russians, albeit that he was liaising with Scandinavian Avionics about a possible entry into the Russian market. He did however meet Mr Sergey Avvakumov (a Russian resident in Latvia) on 24 January 2008; Mr Avvakumov was understood by Mr Karlsen to be an employee or agent of Scandinavian Avionics and Mr Avvakumov never disabused him of that understanding; although he was simply introduced to Mr Karlsen by Scandinavian Avionics, he was working for his own firm, Navigator.
The 24 January 2008 meeting was in Denmark and Mr Karlsen flew over for the day to meet with Scandinavian Avionics to discuss and demonstrate the SAT-111. He met with Mr Truelsen and Mr Redak. During the day he was introduced to Mr Avvakumov, who he understood worked with Scandinavian Avionics and represented them in Russia and the CIS. He told Mr Karlsen that he had been very successful in selling Aero-C systems into Russia and also had high level contacts within the Russian Airworthiness Authorities such that he was well positioned to get the SAT-111 into Russia on the same basis that Aero-C had been accepted years earlier. During the meeting Mr Karlsen demonstrated the SAT-111 system and overall Scandinavian Avionics indicated that they were very impressed with the size and technology. The price of the SAT-111 unit, which was slightly below that of Aero-C, was also acceptable. Mr Avvakumov felt that there was a significant market opportunity in Russia and advised ADS during the discussions that he could move a significant number of units a year into Russia as the SAT-111 would be installed as optional approved equipment and would get Supplementary Type Certificates (“STCs”) to support the SAT-111 as a customer option. Having an STC would also mean that the system had the approval or manufacturer endorsement to install the system on existing aircraft as a retrofit.
I have formed the view that between 24 January 2008 and mid-April 2008 there was little or no contact between Mr Avvakumov and ADS. Mr Karlsen was unconvincing about this; there was little or no mention in his extensive witness statement about such discussions, his oral evidence that he had numerous conversations by way of "Skype" came out of the blue and was not obviously corroborated by any documentation such as e-mails and Mr Avvakumov’s e-mail to him in mid April 2008 suggests if anything that there had been no contact since January. There were Skype discussions after April referred to in emails.
Mr Karlsen met with Mr Chisholm on 1 February 2008 during which there was clearly a discussion in relation to stock levels. Mr Karlsen’s note records "90 units – sell do not worry about supplies". In his statement (at Paragraph 118) Mr Karlsen suggested that this meeting was urgent and necessary to discuss ADS’s "...developing requirement for several hundred units per annum". However, it is doubtful whether even Mr Avvakumov was suggesting at this stage that many hundreds of units would be sold, annually or otherwise. Mr Karlsen sought to suggest in evidence that this estimate followed his meeting in Denmark with Scandinavian Avionics on 24 January 2008; it is clear that Scandinavian Avionics themselves had only been selling 40 Aero-Cs a year; if hundreds of ADS product sales had been actively or realistically contemplated or discussed, Mr Karlsen would have mentioned it. If hundreds were being talked about, his note that 90 units would be available was inconsistent with that. He also said in his statement that Mr Chisholm "reaffirmed his earlier statement to us that if we ran out of SAT 111s ADS would have a SAT-201-based SAT-111 derivative"; there is no hint of that in the note and the re-surfacing of a possible replacement for the SAT-111 was not raised for some weeks. Again I found Mr Karlsen’s evidence on this unconvincing.
Another Satamatics review meeting was held on 7 February 2008 and the minutes record that a "business case [was] required to migrate SAT-111 to a SAT-201i solution". Mr Hatherall said that further SAT-111s could be built as there was a supply of SAT-101-boards set aside. This was consistent with Mr Chisholm’s discussion with Mr Karlsen a few days before.
There was an internal exchange of e-mails within Satamatics on 28 February 2008. A Mr Callender wrote:
"We are running into crisis on SAT-101s for RMAs, due to the supplier contract being about to end, when we have up to 2.5 years left to run with Ocean Alerts.
Matthew [Carlton of Satamatics] has identified a quantity of early SAT-101Gs that were put aside for turning into SAT-111s which we could possibly use to help out here.
Can you just confirm to me that these are going to be OK? - to my knowledge there have been no significant SAT-101G hardware changes that would affect their use with the latest firmware…"
That was passed to Mr Hilton who e-mailed Mr Hatherall and Mr Carlton saying:
"We will need to consider how many SAT-101G boards, if any, we hold back for potential SAT-111 orders. If we decide not to hold any back for the SAT-111 then ADS will have to be told that they may not be able to order any more of them."
Counsel for ADS repeatedly described what was going on at this stage and over the next 3 to 4 months as a "crisis" but in my judgment too much importance has been attached to the use of this word in one e-mail. There was undoubtedly a perceived problem within Satamatics which was that the SAT-101-boards required both for land and marine applications as well as the aeronautical ones were ceasing to be manufactured. Stores had to be maintained for these different applications, in particular for technical support for current owners of SAT-101s who might require a new board, say because units were damaged or needed repair and also for the manufacture of new SAT-111s for ADS if and to the extent that new orders came in. I do not consider that there was a crisis as such but there were conflicting interests within Satamatics. Mr Hatherall said in evidence (which I accept) that in reality the boards were not ring fenced as such.
In this context on 10 March 2008 Mr Lumsden of Satamatics produced a "SAT-111 Production Status Review" which made the point that Satamatics had one SAT-111 left in stock and that the prospect seemed to be of small orders of one or two at a time in the future. Mr Hilton had spoken to Mr Karlsen who had confirmed this and Mr Hilton’s reaction had been that Satamatics would not be "that interested in orders of less than 10 units" because the manufacturing costs for smaller numbers were disproportionately higher. He confirmed in this review (also confirmed in an e-mail from Mr Hilton) on that date that at that stage all the SAT-101-boards had been "earmarked to support" the land based product maintenance requirement. If however ADS "put in an order for 30 units tomorrow then we could satisfy that order". Mr Hatherall considered that at this level Satamatics would definitely find a way of fulfilling an order for 30 as it would mean over a £100,000 profit for the company. Satamatics actually had about 80 (or possibly more) boards in stock. Mr Lumsden recognised that a quantity of the SAT-101-boards would need to be assigned back for the SAT-111. However there was a very real concern within Satamatics, based on sales to date, that there needed to be "a strong business case for holding some of these boards for future builds of the SAT-111s" (see Mr Hilton’s e-mail of 10 March 2008 timed 12.15). The review document did raise the question as to whether there was "sufficient opportunity to create a SAT-201 variant of the aero product?" with the answer being that it would not be technically difficult but that the regulatory approval was very expensive at about £18,000.
Towards the end of March 2008, a new character came onto the scene on the Satamatics side, a Mr Des Bull who was the senior sales manager and who was to become involved in dealings with ADS. It is from about this time that the main issues with which this case is concerned began to arise, albeit in the context of what had gone on before. On 25 March 2008 ADS raised the question:
"We are about to place an order for the last of the current stock of ADS-100. Can you please let me know what the lead time would be for future ADS-100?"
The following day, Mr Bull, the newly appointed account manager for ADS, responded:
"I have requested our production manager to provide me with the lead time to delivery of the ADS-100 product and will advise."
Mr Bull replied later in the day in these terms:
"There are very few remaining SAT-101 elements, due to its cessation of manufacture (non ROHS compliant), and the recent high uptake of spares by field users. We are scouring the premises to see if we can find sufficient to meet your requirement [for SAT-111] and will advise shortly. Longer term I anticipate the need to price the development and integration work necessary to integrate the 201 elements into the existing platform, and then discuss this together".
Based on the evidence which I have heard, I do not understand how Mr Bull could have written this e-mail unless he was misinformed or he was deliberately seeking to mislead ADS. There is no doubt, and I accept the evidence, that there were some 80 boards at least on the premises, albeit administratively they had been allocated to support for the land and marine applications. However it was clear that Messrs Chisholm, Hatherall and Hilton would (if asked) have said that SAT-101-boards could be made available for the manufacture of SAT-111s. It is clear however that no decision had been made to proceed with any new device.
ADS’ reaction was one of concern because it thought that Satamatics was keeping SAT-101-boards aside for them and it wanted to be in a position to sell SAT-111s. Mr Karlsen e-mailed Satamatics (Messrs Hatherall and Chisholm) on the same day that he had quotations going out for "approximately 30 systems from 3 companies", that he had “quotations for 80 systems with several operators in Africa and Russia", that there were "flight trials pending with Russia and Mexico", that ADS was "negotiating with Taiwan another 150 systems" and that the Nigerian and Malaysian Air Forces were "showing interest". It has to be said that this was a gross exaggeration and there were no such quotations or negotiations.
Mr Chisholm in an internal email the following day to Mr Koutrouki and others was clearly annoyed with what was going on, stating:
"When we entered into the relationship with ADS we committed to a business relationship with them and the manufacture of SAT111 (ADS100) based on the SAT101 terminal. ADS for their part paid for the costs of getting the ADS100 certified by the aviation regulators and have invested heavily in their own marketing and sales expenses to generate the opportunities for these products. Indeed, their whole business is now reliant on the success of the ADS100 because by backing this product it actually hastened the demise of the Aero-C solution that they marketed for T&T.
When we announced the end of the SAT101, we assured ADS that we were holding back 80 SAT101 to be allocated to the manufacture of ADS100/SAT111. This commitment was given by Matt Carlton who had them in a separate location to those units identified for Support. We discussed this issue some weeks ago also.
So the fact that we have now blandly informed ADS that we don’t have SAT-101 modules to support the manufacture of SAT111/ADS100 and that we are 'scouring' the premises for bits has come as a huge shock to ADS as they have never been informed that we were using up the stock set aside for this programme to support our repair work. Moving to a SAT201 derived aeronautical version has major cost implications for us and ADS in terms of design and certification. Unfortunately Des will be totally unaware of this. It may well be beyond ADS’s financial capability to get through this redesign and cost implication.
As it happens the reason that Support are using up saleable stock in the repair of SAT101 is that our manufacturer, Exception, has failed totally to provide any support and repair function whatsoever and we have not resolved this situation one way or another. So not only are we using up saleable stock and destroying a customer relationship, we are only delaying the inevitable situation where Support will not be able to repair or replace any SAT101.
This issue has wider implications for Satamatics: our customers buy into a long term relationship with Satamatics and invest in the hardware and expect us to be able to support our products. If we fail on SAT101, what do you think our reputation will be in trying to sell new products?"
On 27 March 2008 Mr Lumsden e-mailed Mr Chisholm to say that "support do still have approximately 90 new [SAT-101s] so some of these could potentially be used for SAT-111, assuming that we agreed to do so". Mr Chisholm e-mailed Mrs Karlsen later that day to say:
"The folks here are willing to set aside 30 system building blocks for the ADS100. You will need to negotiate how that is funded. I would suggest that there is no deposit on complete ADS100s but that you contribute to the base SAT101 because we have to set them aside at risk and will be unable to use them for any other purpose."
Mrs Karlsen’s response the following day was as follows:
"Why only 30 systems? You had promised us that 90 would be available and that is what we have built our business plans around. If we contribute to the base SAT101, then what does that do to the bottom line price of ADS-100? Who are we supposed to be negotiating this with? What figures am I looking at? I thought you were our sole contact. It certainly avoids confusion when we only deal with you. Satamatics have already paid for the SAT-101's whether or not they are slated for ADS-100. You had told me that Satamatics had plenty of use for the SAT-101's as people were already taking the new ones to use for repairs and warranty claims. So I don't see what the problem is with holding all 90 aside for us as originally promised.
As it stands now, we have potential for far more than the 30, so what happens after that? What lead-times am I looking at to produce more ADS-100. How can we continue to promote ADS-100 when we cannot get support from Satamatics to ensure we can have a product to sell? It seems the dynamics of our mutual cooperation have changed. Or am I reading it wrong? If we have success with ADS-100, then Satamatics has success by its association with us. You know how hard we have been working to get this thing off the ground, the competition we face from Iridium and the D+ VARS that install trucking systems on aircraft, and it is not helpful to find Satamatics as being a hindrance too. How do we progress to get things back on track? Is there something you are not telling us? We have staked all we have on this product and then some, so you can appreciate that we won't give up on it easily. I guess we have some more talking to do on Monday, but I'd appreciate your feed back before then. Can you make some time for us too?"
Mr Chisholm replied later:
"…I said you need to convince the CEO because I have to too. He is not looking to get rid of you at all. His questions will be exactly along the lines I have said in that we have a lot of units sat there doing nothing when they could be translated into cash, how long will they be there, how many are really needed, who carries that cost, and what is realistically the result? You would ask yourself exactly the same questions I think.
So we all need to be realistic on what will be achieved and not just hope optimistically. We should examine not just the ADS100 (and therefore the SAT101s tied up) but also how we move forward into a ADS200 situation based on the SAT201 because this would not involve us in maintaining $50k of stock - we would simply draw out SAT201s as and when needed."
There were also discussions by e-mail on that day about lead times for the manufacture and supply of units from the date of order. Mr Lumsden e-mailed Mrs Karlsen to the effect that the lead time was 12 weeks from receipt of order.
The parties agreed to have a meeting on the following Monday, 31 March 2008. It was attended by Mr and Mrs Karlsen, Mr Chisholm, Mr Lumsden, Mr Koutrouki and Mr Hatherall (with the latter two joining the meeting later). No minutes as such were kept of this meeting although Mr Karlsen and Mr Hatherall kept some vestigial notes. It is common ground that a lead time of 12 to 14 weeks was put forward.
The SAT-221 was discussed at the 31 March meeting, that much being clear from both notes. It is clear that Mr Karlsen was told that the lead time for a SAT-111 unit and a SAT-221 prototype would be approximately the same. Mr Karlsen acknowledged that Mr Hatherall’s recollection that a prototype SAT-221 was required for a Russian customer was accurate. That recollection is consistent with Mr Karlsen’s e-mail of 18 March 2008 referring to a "contact in Russia" who wanted to test a system on a helicopter. It is not established who the contact was albeit that it was not Mr Avvakumov. There was a suggestion that ADS might secure 60 SAT-101-boards at a cost of £200 per unit. Mr Karlsen was not prepared to do this, but it provides support for the fact that SAT-101 boards were available.
Some progress however was made about the way forward. It was agreed that that Satamatics would provide a prototype based on the SAT-201 as an aeronautical satellite device and, although this was called various things thereafter I will refer to it as the SAT-221. However, there was no suggestion or even hint at this meeting that Satamatics would not meet any order for SAT-111s in the meantime. Indeed, Mr Karlsen considered that Satamatics would comply with its obligations so that if SAT-111s were ordered by ADS the orders would be satisfied. It is now rightly common ground that there was no binding or unconditional agreement between the parties that Satamatics would, was or became bound to produce or manufacture SAT-221s. Under cross-examination, Mr Karlsen, frankly, accepted that the idea was "to take the 221 to a state where we had a commercially viable product and then take it on from there"; "if there was a market demand for it…we would discuss it further" and there were discussions and judgments still to be made as to whether each party was prepared to go ahead after the prototype had been produced and assuming that it was satisfactory. Essentially, there was a mutual understanding only that a prototype would be produced and commercial and other decisions on each side would then be taken.
Following this meeting, Satamatics set about the process of producing the prototype for the SAT-221. On 1 April 2008, Mr Hatherall produced, internally, for Mr Lumsden an approximate costing for the SAT-221 of €400 together with non-recoverable expenditure of €24,000; this assumed that ADS would take responsibility for and financing of the new DO-160D testing which would be required. Mr Lumsden replied saying that he had asked ADS for a sales forecast which would "form the basis of the business plan to move to [SAT-221]". He told ADS by e-mail:
"…as we discussed yesterday, we need to put an internal business case together to progress the prototype build of the [SAT-221]. In order for us to do so, we need proof of growth and expectation so I really would appreciate it if you guys could provide Des with your forecast as this will form part of the case."
Mr Hatherall produced an internal programme and costings for the production of the prototype (£13,020 and 62 days from 7 April to 1 July 2008), the securing of approvals (£3,340 and 60 days from 2 July to 23 September 2008) and the production of 30 units (£18,240 and 61 days from 2 July to 24 September 2008). The design drawings began to be produced. Mr Hatherall started to liaise with a manufacturer for the new enclosure for the SAT-221. It is clear that within Satamatics some people were enthusiastic for one reason or another to go ahead with the SAT-221. Mr Hatherall was enthusiastic from the engineering side and Mr Lumsden was keen to move away from the SAT-101 by reason of the foreseeable shortage of 101-boards; Mr Lumsden wrote an e-mail to Mr Chisholm saying that he was "desperate to move away from the 101, if only to protect our current customer base". Others such as Mr Bull were less keen. On 2 April 2008, Mrs Karlsen produced some estimates of what might be required in relation to SAT-111s (up to about 450). So far as SAT-221s (which ADS was calling the ADS-200) were concerned, she provided an indication of some 500 sales.
By 16 April 2008 Mr Karlsen had indicated that he would finance the necessary aeronautical testing to be carried out on the SAT-221 prototype. Mr Hatherall’s e-mail of 16 April 2008 to Mr Bull, explaining that Mr Karlsen was finding it difficult dealing with Mr Bull who he felt did not know the history, identified that Mr Karlsen was "about to quote for 35 of these SAT-221s and needs timescales and costs", that he was "looking for a price from us of $2000 to $2500 - this would provide us with a profit in the region of $1400-$1900 per unit" and that he also had "interest from Russia and is looking for a SAT-221 prototype for them to trial".
On that day, Mr Avvakumov had contacted Mr Karlsen by e-mail saying
"Good morning Hans, I do hope you are OK and doing well. We are discussing a helicopter project in Russia. It could be a good opportunity to install ADS-100, make Russian STC and get Russian approval.
Can you provide one system for testing?
What will be SA Net price for complete package…
Will it be possible to integrate dual GPS/GLONASS receiver in ADS-100?"
"Glonass" was the Russian satellite system. Mr Karlsen’s response was:
"…We are in the process of developing ADS-200 which will comprise just one box the same approximate size as the HPA on ADS-100. It will be simple along the lines of our discussion in Denmark…
It will be cheaper than ADS-100 and easier to install and ADS-200 will replace ADS-100. We plan to do the DO-160D/E testing which includes the HIRF testing which Franz mentioned.
Rather than looking at the ADS-100, would you be interested in testing a preproduction ADS-200 unit?"
Later in the day, Mr Karlsen sent to Mr Avvakumov the earlier ADS-200 flyer which he had prepared.
This and other exchanges reveal clearly that Mr Karlsen was not only enthusiastic about the SAT-221 project but was proceeding virtually on the basis, which was not actually correct (which he must have known), that as between ADS and Satamatics there was a done deal.
There were various communications between ADS and Satamatics about the involvement of Mr Bull who Satamatics was putting forward as ADS’ “account manager". Mr and Mrs Karlsen had little confidence in him and the clear impression is that there was a mutual dislike between them and Mr Bull. Various e-mails on 25 and 28 April 2008 confirmed this, typically one on the evening of 25 April from Mr Bull:
"I can not more clearly state my position. It should not be difficult for you to channel your communications to me…particularly when considering there are only two of you constituting the enterprise.
Whilst I can understand you may not prefer my more formal business approach, that is how I wish to conduct it. I have not been obstructive to any of the activities which are currently being undertaken in Satamatics on your behalf, however I'm very mindful that we too are a business concern.
If you want me to be very frank with you, in terms of value to our business, relative to our other clients, you are not exactly in the top 20, and whilst I understand it can be useful to have another string to our bow, it is not an over riding concern versus more profitable use of our time and resources.
I have taken a very relaxed attitude so far, but I find this continuing rejection of the status quo unacceptable…
I note you are advertising to customers that you have product capable of operating on the ISAT M2M service, this is not currently the case, as you do not have a contract in place with us for the provision of the service. I would be pleased to discuss this with you in more detail, should you wish to contract with us for ISAT M2M services.
My apologies if I appear blunt with you, but I hope that you now understand the situation, and that we can proceed in our business dealings together, in a less emotive and more balanced way".
The relationship did not improve.
A meeting was held on 30 April 2008 attended by Mr and Mrs Karlsen and Messrs Hatherall and Hilton to review technical aspects of the "next aeronautical satcom system". The background was recorded in minutes prepared by Mr or Mrs Karlsen:
"Discussions have taken place since mid-2006 regarding the development of the next aeronautical derivative product to SAT-111 (ADS-100) system. Given the recent awareness of the limited remaining supply of SAT-101-boards, consideration is being given to the next derivative aeronautical product called SAT-221 (ADS-200).
Given the state of the market the main driver is to reduce costs, release the equipment according to recognise aeronautical standards, and manage the production lead times to acceptable levels."
There was discussion about the ability within the proposed SAT-221 to accommodate the Russian Glonass arrangement. Mr Karlsen reported that he saw the "Russian market as being significant" and that ADS had "teamed up with Scandinavian Avionics and Sergey [Avvakumov]" who had "extensive experience in the Russian market and a network that would help commercialise SAT-221…and get it through all the technical acceptance procedures". Mr Karlsen reported that he had "obtained agreement to test the SAT-221…prototype on a Russian Helicopter". A programme to enable this was to involve the prototype being supplied in the first week in June 2008. Lead times were discussed and it was decided that a target maximum production time of eight weeks would be acceptable although an ideal time was four weeks after receipt of order.
Mr and Mrs Karlsen discovered on that day that Mr Chisholm and Satamatics had parted company, albeit on agreed terms. They texted each other on the same day:
"Hi Pete, just had a meeting with John H. We are stunned by the news that you left. Will you keep in touch with us and let us know what you get up to? Hans & Marjorie".
"Hi Hans, Not half as stunned as I was, I can assure you! I will keep in touch with you both. Good luck with your relationship with Satamatics – you will need it! Regards, Pete."
"Hi Pete, what do you mean we will need it. When can we talk? Regards Hans."
"Hi Hans, it was nothing specific just that all Satamatics customers will need luck in their relationship with the company. Sorry, I am not able to talk to you at this time under the terms of my contract. Regards, Pete"
Mr and Mrs Karlsen had thus lost one of their key supporters within Satamatics.
There is no doubt that Satamatics was in some financial difficulty. It had been making significant losses for years and Mr Koutrouki as the Managing Director was being required to prepare the company for sale.
Mr Karlsen’s enthusiasm for the SAT-221 project did not diminish. He continued liaising with Mr Avvakumov in May 2008. For instance an e-mail exchange on 13 May was as follows:
"Here are your answers to your questions on SKYPE…
Next Tuesday we are meeting with Satamatics to review all the prices and the future strategy. Since we see ADS-200 as being attractive to the Russian market, would it be possible to provide me with your views on the market potential for Russia. I am not looking for exact numbers or any commitment for sales. I just need your estimate of the market potential, i.e. in your opinion, how many systems could be sold into Russia over the next year and for the following two years. How quickly do you see sales happening after a flight trial?
Also what would be required for market entry (i.e. Glonass Interface)…
I would really appreciate your views on the above - it would help with my negotiations with Satamatics."
Mr Avvakumov responded later on the same day:
"I will try to make estimation of the market potential and send it to you.
From my point of view first of all helicopter market has a good potential so after the trial/testing/demo I would suggest to discuss with MIL helicopter design bureau what kind of paperwork they can accept with the terminal to certify the installation…"
On 14 May Mr Karlsen phoned Mr Hilton about getting the SAT-221 sooner than planned. Oliver emailed him later stating that it would not be possible to get a unit sooner than agreed in April (12 weeks). He had mentioned that in total ADS required three units (one for a customer and two for testing) but Mr Hilton told him by e-mail that, if he required an additional two, the parties would have to come to agreement on price as all that had been agreed was that Satamatics would provide ADS with one prototype.
A commercial meeting had been arranged between the Karlsens, Mr Koutrouki and Mr Bull for 20 May 2008 but it had to be cancelled because Mr Bull was unavailable in consequence of which Mrs Karlsen e-mailed him on 16 May 2008 saying:
"The inconvenience that this causes is that we (ADS) are unable to do any business with regard to ADS-100 or ADS-200. This is costing us money. Add that to the fact that Satamatics is in breach of its contract terms with us and we have what is an unpleasant situation. I am hoping that you will find an earlier date than June 5th as such delay as this is unacceptable to us…"
Mr Bull came back saying that he could not manage an earlier date than 5 June 2008.
Shortly after this, a South American contact contacted ADS a the possibility of aeronautical devices for a client in Peru. Mrs Karlsen replied on 20 May 2008 (copied to Mr McQueen of Satamatics):
"Hi Santiago,
I have attached a specification sheet for ADS-200. This is a brand-new product that is currently being jointly developed by ADS and Satamatics and will be available exclusively through ADS Aerospace. ADS-200 should be available commercially within the next two months. The pricing for this product will be finalized over the next few weeks and once I have more information I will send it on to you. We intend to price ADS-200 to be very competitive against Iridium…Please let me know if ADS-200 looks of interest to your market."
Mr Hilton of Satamatics saw the specification sheet and e-mailed Mr Karlsen saying that the SAT-221 would be slightly wider than the sheet suggested.
On 20 May 2008 Mr Karlsen e-mailed Mr Hilton a long email summarising the SAT-221 project and the requirement for Russia. The email states:
"We agreed during our last meeting that the maximum lead time would be 8 weeks. 12 weeks would work against us and this value was stated by Pete Chisholm and Sandy who claimed it would take 4 weeks to machine the casing, 4 weeks to surface treat and paint and another 4 to screen the text on the casing, assemble and test. Just for reference the lead time for a High Speed Data system costing $300,000 is 12 weeks and this is significantly more complex than SAT-221.
I spoke with Ultra Precision Engineering yesterday and obtained the following information…
Since we are partners in this project I would like for us to get involved with the production of these [sic] unit and to get visibility of the design data pack. We would also like to get to have a joint meeting with you and Syntech to see how we can resolve the production requirements. I spent 3 years in an aircraft production facility…So in summary I am willing to manage the production of the units etc. Please let me have your and John's thoughts on this.
We have agreed to let one unit out for a flight trial to the Mil Helicopter production company in Russia. We need to firm up a firm test schedule. I told them that we could ship the unit during the first week of June. This
has caused me some embarrassment since I now have to delay the project. Our Russian associate would explore if Mil would accept the units released by a manufacturer that complies with AS 9100 or EN ISO 9001. Just to clarify what is involved; we will supply them with the antenna cable and antenna and well as the unit supplied by you. In addition we need to provide a script that will use the NMEA position instead of the internal GPS. They may want to use the existing script using the internal GPS position initially and then move towards the GLONASS NMEA input. Preferably I would like the unit to work on the GP2 server as we need to move away from the existing GP1 portal.MIL Helicopter will pay for the STC (approved installation design) and soon as they have done that there should be a new market for ADS-200 (SAT-221) with new aircraft sales as well as the retrofit market.
Finally, our commercial meeting will only take place on the 5th of June so we cannot delay everything until that meeting. I believe that we need to progress the development on the basis that we will have a SAT-221. Since we have no more SAT101 / SAT-111s, we have been put in a position that we have had to put sales activities on hold, which again has caused us some embarrassment and loss of credibility."
Mr Hatherall replied:
"Oliver has only been tasked with getting one prototype unit put together which we agreed to provide free of charge. Unfortunately, the delay in machining was due to us waiting for quotes from the alternative supplier that you recommended to Oliver. This meant that the order for the machining was only placed a week ago. Production lead times is a different issue and shorter lead times can of course be obtained if long lead items are purchased in advance and put into stock. But I don't think that either ADS or Satamatics are willing to buy stock if not covered by a PO.
Any further development work will only be undertaken once Satamatics has reviewed the business case and a decision made to commit fully to the SAT-221. I understand that you may require more prototype/trial units to prove the market but the supply of these (i.e. who pays) will have to be discussed with Des. I'm not sure if we could get these done along with the one that we've ordered because I believe the machining of the prototype casing is due to start today or tomorrow.
I'll talk to Des but I think we need to arrange a meeting to agree the way forward."
He wrote internally to Mr Bull at the same time:
"…Basically, apart from getting him his first prototype we haven't promised anything - we've simply discussed a number of issues that would need to be resolved IF we move ahead. The provision of the SAT-221 prototype was to guage [sic]/prove the viability of the solution and to ensure that Hans’s Russian customer was kept interested in the meantime."
Mr Bull e-mailed Messrs Hatherall and Hilton on 20 May 2008 as follows:
"I get the feeling Hans is pushing to go beyond what has been agreed. I need to understand the costings and the agreements, verbal or otherwise which are in place to apportion those costs.
Could you please provide me with the projected costs for the current development activity, and retrospectively an approximation of the costs for the SAT111 original development.
Based on the fact that only 19 units of the SAT111 have been sold to date, and our airtime income from them is relatively marginal, I want to be in a position to dictate to Hans, what he must achieve in terms of sales, and in what timescales for the new product.
I know they can be wearing, but if they are trying to push the envelope, I would request at this stage, and until I have a better idea of the agreements in place and the commercial implications, we provide no more than was originally agreed."
At some stage on that day, Mr Bull and Mrs Karlsen spoke on the telephone and this prompted the following e-mail exchange:
"Hi Des,
Correct me if I am wrong. I thought, in our conversation today, you said that SAT-111 was finished. Is that the case or are there still is some boards available to us. The reason I ask is Giovanni d’Urso sent me a sales lead for South America that is looking for 40 systems…"
"Hi Marjorie,
as I understand it the SAT 2xx will supercede the SAT-111. There are a limited number of 111 spares available, and these are being consumed daily by our existing customer base. I believed it would make more sense to propose Sat 2xx as this would be the future supportable product…"
"Hi Des,
I’m happy to go with the ADS-200 (SAT-221) using ISAT M2M but I need an idea of how much we will be charged to buy the units from Satamatics. Things that need to be considered in the pricing are: ADS will organise and pay the necessary testing; systems will be made to order so no stock will be held by either Satamatics or ADS. We had some preliminary pricing from John McQueen last year. Can we get an idea of costs from you prior to our meeting? Also, what is your direct phone number?"
Mr Karlsen had been in touch with Mr Avvakumov and emailed Mr Hatherall (cc Mr Bull) on 28 May:
"I was called this morning by Sergey with the following information:
1) The Mil Design Bureau will carry out the system and installation approval on the Mi 8 helicopter (Over 12,000 have been built) see http://en.wikipedia.org/wiki/Mil_Mi-8 . From what I understand, this means that we will not need all the EASA approvals etc., and it will be fully approved by the Russian Authorities. It means that any operator of these helicopters can easily get the approved installation design from the Mil Design Bureau and install the system themselves.
2) This approval will be followed by the approval of the system on the Mi 26 helicopter, which is the largest helicopter in the world see http://en.wikipedia.org/wiki/Mi-26 .
3) They have requested the Installation manual of ADS-200 so that the design engineers can carry out their design and system approvals in advance of the actual flight trial.
Sergey has friends with the highest officials in the Russian CAA and the main reason why they are interested in us is that Aero-C is no longer available and we have the only Inmarsat approved tracking system. He indicated that the total sales potential is for several hundred units.
Both these Russian opportunities will be significant. Furthermore we have two additional customers, with over 70 aircraft, as well as two military organisations waiting in limbo for information on ADS-200. I hope that Satamatics will support making the fully tested ADS-200 available ASAP."
Mr Bull indicated on the same day that he was working on a pricing plan as indicated but he could not provide a price before the meeting on 5 June 2008. Mrs Karlsen pressed him for a price but this came to nothing. E-mails about this carried on but got nowhere. Internally on 30 May 2008 Mr Bull provided to Mr Koutrouki and Mr McQueen figures about the SAT-111 sales (17 producing a gross profit of £23,820) and the SAT-221 current development. With regard to the latter, having listed various costs, he stated:
"I feel that we should demand an initial purchase price by ADS in order that we can achieve our [non-recoverable expenditure] and some profitability from day one. Even if they maintained their current market price (unwise), this would mean an outlay to them of circa 50K. If they are truly committed and have belief in achieving the sales they so often say they can achieve, then they should have no difficulty in raising funding, in the likely event that their company [do] not have sufficient equity to fund this order. (Re-mortgage perhaps?). I feel it is time we made them run their own business and take their own commercial risks…"
Mr Bull had also been doing some Companies House research on ADS which he recorded in an e-mail to Mr Koutrouki also on 30 May 2008 which suggested ungallantly that Mr and Mrs Karlsen appeared "to have been involved in more companies than Del Boy Trotter” (a reference to an ageing wide-boy in a television series “Only Fools and Horses”). He provided some detail about this and concluded:
"I think this overview of their financial track record may indicate my proposed plan of tying them in to qty purchases of 5, 10 units at a time would fall on stony ground. Airtime hike probably wouldn't of them as this [is] a short pass through to the end user with no advanced finances required…"
Mr Koutrouki’s response was that looking "at these numbers you would normally ask for an upfront commitment as they may not be around for not [sic] much longer".
For the meeting fixed for 5 June 2008, Mr Bull proposed an agenda: ADS current company standing, ADS future sales and 12 month forecast, SAT-221 price and the minimum order quantities and a revised airtime tariffs and terms. Mrs Karlsen believed that Satamatics’ current company standing should be discussed as well. They could not agree on an agenda but Mrs Karlsen sent an agenda which included: the Role of Mr Bull, ADS-200, Sales, Risk, Russia, Conclusions and Actions.
The 5 June 2008 meeting was the first occasion when Mr Bull met the Karlsens. Minutes were prepared by Mr Bull albeit that certain amendments were suggested by the Karlsens. The attendees were the Karlsens and Messrs Koutrouki, McQueen and Bull. Since it is material to the issues between the parties, I will set out the relevant parts of the minutes, only one phrase of which was not agreed (identified in square brackets in Paragraph 5):
"…2. MK/HK gave an overview of where ADS are positioning themselves in the market, and indicated that they were not just targeting the general aviation market, but were also looking specifically to exploit a niche sector opportunity for design approvals and integration of the SAT-221 into the Russian Mil 24 and 28 airframes…
4. DB presented the Satamatics sell price of the SAT-221 to ADS, of £2000 per unit. This was based on an end user sell price given by ADS of between £4000-£4500. The antenna costs about £1800. The objective is to keep the total price below $10,000.
5. DB stated that it was not cost and resource effective for Satamatics to manufacture this product in single or small quantities, therefore there was a minimum order quantity of 10 units for single drop delivery, the first order to be placed with Satamatics on completion of initial trial in July/August 2008, after the Russians have successfully approved the installation [and when they place an order]. Thereafter there will be a minimum order quantity of 5 units, for single drop delivery.
6. HK stated that the Russian opportunity had introduced a new development requirement in that it was required for the SAT-221 to receive position information not from the standard U.S GPS satellite network, but from …”Glonass”…This will require specific script development by Satamatics. DB stated that Satamatics must now generate a fixed specification for both the SAT-221 and its associated Glonass script…
7. HK requested a defined and agreed, delivery lead time for orders placed on Satamatics and indicated that a 6-8 week commitment would be acceptable. Action: DB to confirm to ADS a committed lead time.
8. DB asked for an indication of the sectors and organisations which would be the targeted end users for this product, and what the likely quantities and timescales would be for [an] order roll-out in the immediate 12 months following the launch. HK stated that this would be best answered by Sergey a representative of Scandinavian Avionics in Russia (ADS channel partner) and that he would arrange a meeting between this gentleman and Satamatics. In the interim DB requested HK to contact him and to obtain some advance indications of the particular target opportunities, qualifications and timescales. Action: HK to obtain advance information and pass to Satamatics.
9. DB stated that current airtime revenues would not be sustainable by Satamatics for new business on the ISATM2M services and indicated that they pro-rata uplift of 40% on all airtime tariffs would be implemented…HK indicated that predominantly ADS was focussed on achieving hardware sales / market share, and indicated that Satamatics may wish to take on the Airtime provision directly…"
It does not seem that this meeting was acrimonious as such but it is clear that no final agreement or commitment was made by either side to the SAT-221 project. There is no dispute that it was agreed at the meeting that ADS would at some stage submit an order for a minimum of 10 SAT-221s and that the order would or could be after the prototype had been successfully tested in Russia. After Mr Bull sent the draft minutes on 6 June 2008, Mr Karlsen returned "corrected" minutes on 9 June 2008 which included the qualification that the order would follow "when [The Russians] place an order". Mr Bull challenged this amendment a few hours later saying that Satamatics would require the initial order "on completion of the acceptance trial". Mrs Karlsen’s reply was:
"If the trial is successful, then obviously the Russians will place an order, but we cannot place an order with Satmatics until such time as they do. Hopefully that will happen quickly, and once we meet with Sergey, we will have a better understanding of the timings. The new product is not released on an EASA Form 1 and if the Russians do not buy it, we cannot sell it anywhere else. So let's wait and see what the Russian timing is before we commit to an order. I appreciate that you want to recover your start up costs right up front, but we too are out of pocket as a result of the withdrawal of ADS-100 without the one year’s notice. So let's keep working together in the spirit in which we ended our meeting and get the trial done successfully sued the sales can start happening."
In reality, this was where and when the relationship began finally to unravel. Mr Bull e-mailed back on 10 June 2008 saying:
"I am sorry but I am not able to accept that we take the extended commercial risk in your venture. I have been informed today that we are being requested to build 2 more units in addition to the one prototype agreed. This, and other unanticipated demands are increasing the scope of our work, beyond the initial brief. If we are to continue, I need a firm milestone as to when we will recover our costs.
As you know from our meeting I took an action to define the product specification and an acceptance test procedure with Engineering. I wish to receive order placement on the completion of your acceptance test from us of the units, pre aircraft trials and without any conditions such as end customer order placement.
At the moment the situation is open ended, with all variables outside of Satamatics control, which is why I must define this order point milestone."
Mrs Karlsen’s response shortly thereafter was:
"We are sorry that you are taking this approach. It appears that you are unwilling or unable to meet your contractual obligations to us and you are leaving us with little option other than to refer this matter to our solicitors and take their advice on how to proceed. Satamatics’ failure to honour our existing arrangement has already caused us substantial losses and these can only increase if the situation is not resolved immediately.
However, we would prefer not to engage in a legal battle and hope that Satamatics will take the decision to put the effort into rectifying their default and produce ADS-200 to a production standard in short order.
Please advise us by return so that we can be certain as to where you stand."
Mr Bull replied on the same day:
"I am sorry you feel like that.
The situation regarding the cessation of the 101 product was made clear to you, as were the options to purchase and ring fence future production and stock, which you declined.
Satamatics will not be moved on this point.
I purposely set the ADS buy point of the 221 as low as I could in order that it gave you the best possible head start.
I don't think the sum of money for the initial purchase quantity (£20,000) is an inordinate amount for a company such as ADS to invest in securing their future product line. I find it even more perplexing that you should consider it acceptable that we should extend this amount on your behalf, with only an abstract non-tangible dateline for Satamatics to recoup the costs.
I had to maintain a sensible and logical business approach between our companies, and the current expenditure of our efforts and resources does have a cost which will have to be met to our timescale."
The matter rested there for several days. On 11 June 2008, Mr Karlsen had a technical discussion with Mr Hatherall in relation to the prototype and the need for Satamatics to secure Immarsat Type approval. He said that the "unit intended for the trial in Russia is a prototype unit and may change in the final production version". He called for an additional two casings. Mr Hatherall replied that commercial issues had to be settled first but that his team had started producing the installation manual.
Mr Bull got to hear about this because he e-mailed ADS on 13 June in the following terms:
"The current email correspondence between ADS and our Engineering Director, introducing topics of a contractual nature which are outside of the purely technical content, agreed previously, is stretching my patience to the utmost.
May I ask when I can anticipate a response to my recent email regarding Satamatics requirement for the initial order placement of Qty 10 units on completion of prototype and acceptance testing.
Should your response be, "because we are waiting for a response on air time tariffs", I will not consider it as valid. I have previously, quite clearly, stated that the ISATM2M Tariffs will consist of an increase of 40% pro rata to the existing D+ tariffs. The tabulation of these tariffs will be included in any future revised contract.
My I ask that you please suspend communications with our Engineering Director, until such time as the commercial terms and way forward are clear between us."
Mrs Karlsen responded:
"There is no need to respond in the manner you have and I fail to understand why you are reacting in this manner. You had told us in our meeting that you would send me the airtime packages, so I don't know why it is such a problem? John Hatherall has said he will forward documentation to Hans today and that may require some discussion between them. Are you saying that unless we commit to £20,000 with Satamatics that we cannot communicate any further? Are you planning on withholding the documentation and airtime information from us unless we commit to the £20,000? Please advise."
Mr Bull responded on the same day:
"Perhaps as a re iteration and to assist you in your understanding you could re- read my email of the 10 th inst. (extract below).
I fail to see how this and my other emails to you on the topic could be any more explicit.
I ask you again to please confirm your agreement to purchase 10 units on completion of prototype development and Satamatics to ADS acceptance test."
By 13 June 2008, Messrs Hatherall and Hilton had produced the first issue of the "SAT-221 Preliminary Declaration of Design and Performance". This broadly described the SAT-221 in design terms. On the same day, this was sent to Mr Karlsen along with SAT-221 installation instructions. This latter document was necessary for the installation of the prototype.
There was also some e-mail discussion on 13 June 2008 about the possibility of manufacturing a new SAT-101-board with Mr Hatherall saying to Mr Karlsen that he had understood that "ADS’ decision was to not commit to SAT-111s but to look forward to the SAT-221”. He went on to say that he was not sure if Satamatics had any SAT-101s left in stock but he would check; he said that the SAT-101 could no longer be manufactured "due to obsolete components and the fact that it does not comply with RoHS".
There was another exchange of e-mails on 18 June 2008:
(a) ADS to Mr Bull (cc Mr Hatherall)
"Like Satamatics, we too, are a commercial entity who buys and sells commercially viable products. It appears that you read my email with certain assumptions in place that appear to influence your response. Please let me clarify what I was attempting to put across.
1. The Russian market opportunity is at risk of being lost.
2. The development of the SAT-221 has been a collaborative effort between John and myself. To bring this product to a point where it is suitable to be used in a flight trial with the Russians, certain areas need to be addressed immediately. Inmarsat has stated that prototype products cannot access the space segment without prior type approval. Therefore, any prototype that John produces must have Inmarsat type approval, otherwise it is just a box that cannot be used for anything. I obviously should have used the phrase "SAT-221 development project" rather than the Russian Helicopter Project.
3. You seem to be fixating on the need for us to issue you with a purchase order for 10 units to recover your development costs. But exactly what do you define as "units"? We will only issue an order for production standard units that are commercially viable, or to state it more simplistically, something that we can sell. For the SAT-221 to reach that stage of being commercially viable, it has to have been successful in the Russian flight trial and certification. Without a successful flight trial and certification, there is no product that is commercially viable.
4. It appears that we are in a "catch-22" situation. You are concerned about recovering your development costs, but those costs will not be recovered if the SAT-221 project does not reach a successful conclusion, ie the successful Russian flight trial and certification. It does not make good commercial sense for us to issue a purchase order for 10 units if the SAT-221 project is not going to be successful.
One of your emails stated that you were going to provide us with acceptance tests for the SAT-221. Could you please provide them?
We also have yet to receive the airtime packages you said you would provide during our meeting - We feel that a straight addition of 40% to our existing structure prices the airtime above the airtime prices quoted by other Satamatics partners and is both excessive and uncompetitive. You also mentioned that you want additional contractual requirements. I think it is reasonable to provide us with any revised prices and changes in air time conditions to us as soon as possible."
(b) Mr Hatherall’s reply:
"Just to be clear about Inmarsat Type approval. Concessions are in order for prototype units as we obviously need to do a certain amount of testing before we can submit results. We do not, therefore, have to gain full type approval to do an initial trial.
When we first agreed to provide a prototype, the reason was to prove the concept and demonstrate viability to the customer to enable us to make a decision with regards to continuing towards full product status. The goalposts seem to have moved over the past few months such that now it is not a prototype that is required but a fully approved product.
Therefore, from a technical standpoint (never mind the commercial arguments) timescales are obviously affected. We now have to manufacture more units - we need at least 4 compared to the original 1 prototype. The enclosures can't be ordered until the protype enclosure has been proven and accepted. If we deliver the prototype, then we can’t start Inmarsat Type approval testing until we get another unit (btw Hans we will need a sensor systems antenna) - i.e. 5 weeks. Inmarsat Type approval could then take another 4 weeks. Other tasks include documentation, data pack for manufacturing, test solution for manufacture, script proving, web app changes etc. etc. These timescales assume we have resources available to do the work as and when required - this might not be the case.
Hans - can you please specify exactly what you need (technically) and by when? We now have the prototype assembled and working - do we ship it to you or do we keep it to do Inmarsat Type approval testing?"
(c) Mr Bull’s replies
"I will now put the situation quite bluntly. Until I receive your firm commitment that you will place an order for 10 units on completion of the prototype`s acceptance test between Satamatics and yourself, all activities relating to SAT221 development by Satamatics personnel will cease.
(d) I will not endorse your suggestion that you and John Hatherall immediately take over project management of the Russian Helicopter Project, that is your project alone. John’s current objective is purely to develop the SAT-221 product and delivered to you a prototype.
As I have already stated several times, we have already incurred costs and wish to see a committed order from you for 10 units, which as a minimum would recover our development costs, and not an open-ended possibility that we may, some day, make a recovery."
Mr Hatherall continued to have some contact on technical matters with Mr Karlsen but Mr Bull reiterated the first paragraph of his 18 June e-mail on 19 June 2008. Meanwhile Mr Karlsen was in touch with Mr Avvakumov with the former agreeing to put together a requisite installation manual and provide other technical information. On the 27 June Mr Hatherall emailed Mr Karlsen stating that the SAT-221 unit was now activated on Satamatics’ gateway and that it used ISAT M2M (D2). He wanted Mr Karlsen to check that it worked; Mr Karlsen checked the web application and it had been working. This was in the context that the prototype unit was due to complete testing on 30 June 2008.
On 27 June Mr Avvakumov emailed Mr Karlsen with a request that he had received from MIL Design Bureau and the Russian Aeronavigation Institute raising questions about the ADS-200 Installation Manual. Following this, Mr Karlsen on 30 June emailed all the ADS-200 documentation (now received from Satamatics) to Mr Avvakumov, including the documentation for a converter, which he had procured separately (not from Satamatics). On 1 July 2008 Mr Avvakumov confirmed that his Russian customers used 3-minute reporting intervals for helicopters (with Aero-C). For the SAT-221, 3minute intervals for normal routine operations and 2 minute intervals for distress reporting were to be used.
On 14 July 2008, after Mr Hilton of ADS verified that the SAT-221 worked with a particular converter, Satamatics dispatched the prototype and the converter. On the same day, Mr Bull emailed ADS:
"…to date, I have still not received commitment from you to purchase the 10 units. Please be advised that all activities on this project will cease by noon, midday, on Friday 18th July 2008, unless I receive the committed undertaking from you, prior to this point in time."
On the following day Mr Hatherall emailed Mr Karlsen the 19-page "SAT-221 Prototype Definition and Acceptance" tests, stating:
"I've attached the acceptance test document, which we need to agree - compliance against which will require the commitment to purchase that Des mentions. Note that delivery of the prototype is not affected."
Following some emails to and from Mr Avvakumov, Mr Karlsen sent a letter dated 21 July 2008 to Mr Koutrouki, which having addressed the history from February 2008 went on:
"…Since then we have progressed matters with a potential Russian client to a point where it is likely that an order or contract will be secured, with obvious benefits to both of us.
However, despite this progress it now seems that Satamatics is happy to threaten our relationship and the securing of this order by forcing us to commit to an order with Satamatics for prototype units before development and certification have been completed and therefore before we are in a position to secure any orders. It appears that we are being forced to pay for the development of a new product, a cost that should clearly fall to Satamatics under the Agreement to meet its obligations to actually supply the SAT-111 product. There is no doubt that these actions amount to economic duress, some might even suggest that they are tantamount to "blackmail".
Faced with this situation we are forced to remind you of your contractual obligations under Satamatics’ exclusive distribution agreement ("the Agreement") dated 20 December 2005 by which we are Satamatics’ " exclusive worldwide distributor for the SAT-111 Product and any future derivatives thereof" (Clause (C) of the Agreement).
Furthermore, the assertion that your Company’s offer to let us buy a limited stock of spare boards is not a remedy for your breach of contract, as it does not result in a final product and it does not give us the necessary one year notice of termination of a product, as required in the contract.
There is no doubt that Satamatics is in breach of the Agreement by its failure to provide us with 12 months advance notification of your intention to cease manufacture (Clause 3.2 of the Agreement) and its inability to supply the SAT-111 Products to us associated with the cessation of production (Clause 3.1 of the Agreement).
As a consequence of those breaches:
(1) We have wasted substantial costs and time in running a business to promote and sell a product that has become unavailable for sale;
(2) We have lost sales. There is a high risk of losing the whole Russian project which would be a substantial loss to both Satamatics and us;
(3) Our business, as it relates to Satamatics, has now been put in limbo and we have been unable to promote either ADS-100 or ADS-200;
(4) We have lost credibility and our image, goodwill, and the associated good ADS brand name (built up over the past 15 years) has been damaged;
(5) Because we did not get a year’s notification, the possibility that we could redeem the situation by taking a licence to manufacture the SAT-111 Product (as provided for at Clause 3.2 of the Agreement) has been lost.
We estimate the damages we have suffered and will suffer as a consequence of these breaches of the Agreement to be in excess of £500,000.
We have persevered with Satamatics in an attempt to mitigate our losses and have attempted, in good faith, to work with Satamatics to find a way forward to remedy those breaches, including offering to provide our resources to help in the production of a new substitute product as a short term remedy. It now appears that this is no longer possible. Your current refusal to finalise the development of SAT-221 serves to exacerbate and continue your breaches of the Agreement. The most recent email from Des Bull only serves to reinforce Satamatics’ intent to continue the breach of this agreement.
In light of this recent dictate issued by Des Bull, we are now left without any products to promote or sell, doubt as to where we stand regarding airtime, a flight trial with the Russians potentially cancelled, the Russian [sic] having wasted significant time and funds (estimated in excess of $50,000) on the Supplementary Type Certificates (STCs) for the Mil 24 and Mil 8 helicopter, which was undertaken in good faith that they could trial the SAT-221 and our reputation with the Russians and the Mil Design Bureau will be ruined. In effect, our business has been shut down, unless Satamatics changes their position. In this regard it is apparent that Des Bull’s involvement is not conducive to a workable business relationship.
If this obstructive attitude continues then we will have little option other than to seek compensation through the courts. We do not believe that this would be the best option for either party and it would be better for all concerned if we are able to resolve our current difficulties. However, that will require a change in attitude on the part of Satamatics to ensure its full cooperation with us and its full commitment to SAT-221.
In the hope that you will accept this letter as a genuine attempt to take matters forward and avoid further confrontation we suggest the following:
(1) Progress the Russian flight trial immediately without delay, and absorb the airtime costs.
(2) Produce the Sat-221 to a production standard within 8 weeks of the date of this letter at Satamatic’s expense. This will include getting the Inmarsat Type approval and completing the DO-160 testing (i.e. to the same standard as the SAT-111).
(3) The existing Airtime Agreement shall be extended to include ADS-200 and the Isat M2M service at our current tariffs’
(4) The prices for the airtime and SAT-221 shall remain the same for the next 12 months and any subsequent price increases shall be limited to a maximum of 10% above the UK inflation rate and the Airtime price increase shall be in accordance with the existing airtime contract.
(5) Provision of the SAT-221 shall be subject to our existing Distribution Agreement so that Satamatics will provide us with a minimum 12 month notice of the cessation of production of the SAT-221
(6) In order to obtain EASA Approval for the SAT-221, which is necessary to sell the SAT-221 to the civilian market sector, Satamatics will assist ADS Aerospace at no cost, in obtaining the necessary Quality Assurance, production and technical information to facilitate this approval and the associated manufacture of the SAT-221 through a recognised EASA approve organisation.
(7) In order to avoid unnecessary confrontation, Des Bull is to have no further involvement in our arrangements with Satamatics and the application of the Agreement.
(8) We receive your confirmation of acceptance of the above before the 28 th of July 2008.
We look forward to receipt of your constructive proposals."
On 30 July 2008, Dino Koutrouki responded by letter stating that:
"I have come to the decision that there is no viable commercial business proposition for Satamatics remaining in this market, and accordingly I formally give you notice by this letter that, under paragraph 3.2 of the Agreement between ourselves dated the 20 th December 2005, we are serving you notice that we intend to cease manufacture of the SAT-111 Product twelve months from the date of this letter.
Satamatics will continue to honour its commitments within the Agreement until such time as the contract is terminated and can confirm that we hold sufficient stocks of SAT-111 units to meet your demand over the next twelve months.
I take this opportunity to point out that at all times Mr Des Bull has acted professionally and in accordance with either my instruction and/or knowledge.
May I take this opportunity to express my disappointment that the SAT-111 product did not sell as a well as predicted, thus making it an unprofitable product for both parties."
From this moment on, no further orders were submitted. The prototype was not used and indeed was not even turned on. Solicitors’ letters were exchanged in September 2008. ADS’s solicitors letter of 10 September 2008 asserted that the SAT-101-boards were no longer in production and that Satamatics had previously advised ADS that it had little or no stock; this followed a letter from Satamatics’ solicitor indicating that it could "meet its obligations under the agreement…to supply such quantities of the SAT-111 as required by [ADS] until the [12 months'] notice has expired". ADS’ solicitors suggested that the refusal to supply SAT-221s would lead to a loss of £2.7 million in profits over the next 3 to 5 years. However they called upon Satamatics to accept its "legal responsibilities" and indicated that proceedings would be issued if there was no constructive response. The response came by way of a holding response on 12 September 2008.
By mid-September 2008, Mr Karlsen was telling Mr Avvakumov that "Satamatics will not let us have the" SAT-221. Mr Avvakumov had estimated at that time that the market in Russia for a tracking system with the Glonass option was 500 to 700 units over 3 to 5 years.
On 24 September 2008 Mr Karlsen wrote to Mr Koutrouki seeking to persuade him to change his mind and proposed terms in relation to the furtherance of the SAT-221 project. That evoked no or no constructive response.
There had been some discussion about a possible order for two SAT-111s in late November or early December 2008. On 5 December 2008 Mrs Karlsen e-mailed Mr Bull in the following terms:
"We have two letters, one from Dino and one from Satamatics' solicitors, both stating that "there are sufficient SAT-111 units in stock to meet our requirement". Can you please clarify why we are now being told that the units need to be manufactured. Where have the stock SAT-111 units gone?
If the SAT-111 units need to be manufactured and you have, as you have stated, all the components in stock, then why will it take 8 to 10 weeks to assemble the components? Surely a short lead time from receipt of order is possible. We would also appreciate your advising exactly what quantity of SAT-111 units are available.
As we have to provide a statement regarding ongoing product support for the SAT-111 to our client can you please provide an indication on how long you will be able to support the SAT-111. Specifically can the SAT-111 be supported and repaired through a 1 year warranty period and how many years can it be supported or repaired beyond the 1 year warranty period.
Our customer is anxious to know when we can provide him with two ADS-100 systems, so a speedy response will be appreciated"
There is no evidence that there actually was a customer as such and I have formed the view that Mrs Karlsen (unknown to Satamatics) was probably "trying it on" to see what the reaction would be.
Internally, Mr Bull said to Mr Lumsden by email on the same date;
"Basically we committed to supply the product to them for the 12 month notice period of their termination of contract, based on their previous sales track record, this is a minimal risk. I believe there were initially circa 80 boards available, but due to RMA of other clients products, this may now be reduced slightly.
I am not clear on the general status of SAT-101 product, i.e. whether an obsolescence notice has been issued, and what our company policy is in terms of support period of products, post cessation of manufacture."
He replied to Mrs Karlsen on 8 December:
"To clarify, the letter from our solicitors (24/09/08) stated 90 “PCBs” were available, at the point of offer of the ring fenced stock.
These PCBs are common to both the SAT-101 and SAT-111 products.
The quantity of SAT-101/111 PCBs we have available is not fixed at any point in time, as it is subject to demands from other purchasers of our SAT-101 product. Suffice it to say, we have planned internally for your potential orders, and have absolutely no doubts that we are fully able to meet all your order requirements for SAT-111 product, in the remaining months of your agreement with us.
The delivery time scale offered of 8 to 10 weeks is due to both the fact that we need to source the milled out avionics housing from a sub supplier, and the lead times, necessary to allocate the common resources needed to implement your potential order with respect to our current scheduled manufacturing load. The delivery time you have been offered is the optimum estimate.
Any SAT-111 product you order within the remaining period of our agreement will be warranted for 12 months from delivery. Post cessation of our agreement we will provide costed out of warranty repair support for a further 12 months from the date of cessation."
Mrs Karlsen tried again on 19 December 2008, emailing Mr Bull;
"As you know, we had an urgent requirement from one of our customers, for two ADS-100 systems. We took the letter from Dino and from Satamatics solicitors, in which they both stated that Satamatics had SAT-111's "in stock" as factual and relied on this statement to secure the sale. We assume that the previous statements made to us about your levels of stock were simply untrue. Due to the unreasonable long lead times quoted by you, the customer decided to purchase two SkyTrac systems instead. We had, in the past, voiced our concern that such lengthy lead times would make it difficult to secure sales and this most recent lost sale only underlines our concern. In your last email of 8 Dec. you stated that the quantity of SAT-101/111 PCBs available is not fixed at any point in time as it is subject to demands from other purchasers of SAT-101, but you have planned internally for our potential orders. Once again, I am asking you to advise, as of today's date, the exact number of SAT-101/111 PCBs you have available."
Mr Bull replied:
"In our letter of 20th August 2008 we stated that:
'Our client confirms that they will be able to meet it obligations under the agreement with Airborne Data Services Limited dated 20 December 2005 (“Agreement”) to supply such quantities of the SAT-111 as required by your client until the above notice has expired.'
We therefore re-iterate our position that we will abide by the contract, including maintaining sufficient stock for your product line until the end of its production - i.e. 29th July 2009.
It is your responsibility to maintain such stock levels as necessary to satisfy your potential customer demand, under clause 4.4 of the Agreement, therefore if you wish to do this in the future, then please place an order with us to cover your future demand.”
It is clear that at all times from early 2008 onwards Satamatics had enough SAT-101-boards to satisfy any order for SAT-111s which ADS might realistically have submitted. For instance by 8 September 2008, as recorded at a weekly meeting, some 100 boards were available. Indeed by the time of the trial, some 27 were still available and unused. Between 2008 and 2012 Satamatics continued to supply airtime to ADS in respect of the units which were sold and ADS has continued to pay for such air time for onward sale to its existing customers. In addition in June 2009 Satamatics provided technical support by way of response to a request for repair of a SAT-111 unit in June 2009.
Little of relevance to these proceedings happened until the proceedings were actually issued.
The Proceedings
ADS issued its claim on 12 August 2011. The pleadings are (unusually but properly) succinct. The Amended Particulars of Claim identifies the Agreement and pleads at Paragraph 6 that the parties "developed a derivative of the SAT-111 product called the SAT-221 product …" Paragraph 7 pleads that in breach of Clause 3.2 of the Agreement “the Defendant ceased manufacture of the SAT-111 product (including derivatives thereof) without giving 12 months notice to the Claimant". The details recite the history in 23 sub-paragraphs between 1 February and 30 July 2008. Paragraph 7A (only pleaded by way of an amendment on 12 June 2012) pleaded that by reason of the matters pleaded in Paragraph 7 and referred to in Paragraph 28 of the Amended Reply "the Defendant repudiated the Agreement, which the Claimant accepted by conduct in or around December 2008." The acceptance by ADS of the repudiation is said to have arisen in the circumstances set out in Paragraphs 7A to 7E, which include the contents of its and its solicitors letters of 21 July and 10 and 24 September 2008 referred to above. Primarily the acceptance is said to have arisen because ADS placed no further orders, did not test or operate a prototype and had no further contact with the Defendant after 2008. Damages are pleaded as being a loss of profit on sales of product (US$15,180,000), lost profit on airtime (US$1,656,000) and general damages (unquantified in the pleadings) for loss of goodwill. The large claim was based on the loss of 1380 sales including 700 in the Russian Market, 350 in Taiwan, 113 to the Malaysian Airforce and varying smaller numbers to other countries around the world.
The Amended Defence denies that there was any breach as alleged and that EMS ceased to manufacture before the expiry of the 12-month notice period given by EMS in its letter dated 30 July 2008 to ADS. The Defendant denies that the SAT-221 was or became a derivative of the SAT-111 within the definition of "Products" in the Agreement. The Claimant’s quantum is positively challenged and there is reliance on the exclusion or limitation clauses in the Agreement. It is denied that there was any repudiation or any acceptance.
The Amended Reply takes issue with many parts of the Amended Defence. Paragraphs 6 to 9 plead as follows:
"6. Satamatics subsequently represented to ADS, orally and in writing and by production of supporting technical documentation for flight trials of the SAT 221, that:
(a) The components used by Satamatics for the manufacture of the SAT-111 were no longer being manufactured because they did not comply with the relevant standards and were obsolete;
(b) It did not have and would not maintain sufficient stock of component parts to manufacture enough SAT-111 Units to meet ADS’ sales projections;
(c) In order to meet those projections and other future sales, Satamatics would develop a derivative of the SAT-111, based on the components used for the SAT-201, that it would sell to ADS;
(d) ADS should market the derivative rather than the SAT-111 as the derivative was a "future supportable product" (Des Bull’s e-mail 20 May 2008);
(e) The distribution of the SAT-201-based product would be under the Agreement.
7. ADS relied on Satamatics’ representations by generally ceasing to promote, market and sell the SAT-111 and by promoting and marketing the SAT-221 as its successor and in its place. It persuaded its clients that they should look to purchase the SAT-221 rather than the SAT-111. Although ADS initially offered the SAT-111 to the Russian Market, following and in reliance on Satamatics’ representations the proposed sale to the Russians was on the basis of the supply of the SAT-221.
8. In or about July 2008 Satamatics manufactured a fully functioning SAT-221 and supplied this to ADS with all necessary documentation…to enable Mil Design Bureau to produce a preliminary Supplementary Type Certificate on the Mil-8 helicopter as required by the Russian Authorities to allow flight trials.
9. In the circumstances Satamatics is estopped from claiming that:
(a) it could manufacture sufficient SAT-111 units to meet its obligations to ADS under the Agreement;
(b) the SAT-221 was not developed to replace the SAT-111;
(c) it did not agree to supply the SAT-221 to ADS;
(d) the provisions of the Agreement, in particular Clause 3.1 and 3.2, do not apply to the SAT-221;
(e) it was not able, by July 2008 at the latest, to supply the SAT-221 to ADS in a fully developed form and as a replacement for the SAT-111."
No particular pleading points have been taken by either party even though there has been some development of what was pleaded by the Claimant. The Claimant now asserts estoppel by convention, representation and election (promissory estoppel) as well as putting forward, now exclusively, its damages claim on a loss of opportunity basis.
Issues and Discussion
The liability issues raised by the pleadings are, generically, as follows:
(a) Did Satamatics in effect cease to manufacture the SAT-111 prior to July 2008?
(b) Was the SAT-221 to the extent that it was developed by July 2008 or had it become a "derivative" within the meaning of the definition of "Product" in the Agreement? Had EMS become obliged to manufacture and supply the SAT-221 at any stage?
(c) Is the doctrine of estoppel (promissory, convention or representation) materially engaged in any respect?
(d) Did Satamatics repudiate the Agreement? If so, was such repudiation accepted?
In my judgment, having reviewed all the evidence, I find that Satamatics had not as such ceased to manufacture the SAT-111. My reasons are as follows:
(a) It is clear on the facts that the manufacture of the SAT-111 was largely and indeed on most occasions sub-contracted out by Satamatics. The manufacturing process was not like a production line and it was done to order mostly by hand with the aluminium enclosures being machined out of aluminium blocks and with the various components being inserted.
(b) Satamatics’ obligation under the Agreement was to react and respond to orders from ADS; Satamatics was entitled and obliged to produce the ordered SAT-111s within a reasonable time and that reasonable time was to take into account a reasonable period for manufacture and assembly. There was no obligation on its part to maintain stores of SAT-111s and indeed the Agreement envisaged that ADS would maintain stores of them, albeit that this did not happen.
(c) The Agreement envisaged that ADS would provide regular sensible forecasts of what was likely to be ordered over the coming periods. Although this was more honoured in the breach than in the observance by ADS, this obligation is of some importance because, if and to the extent that ADS’ historical forecasts were moderately accurate (which they were not), it would enable Satamatics sensibly to plan for the manufacture of units when the orders came in.
(d) The problem with the impending obsolescence of the SAT-101-boards was one of which both parties were aware from 2006 and probably before. Both parties must have realised that their mutual belief that the RoHS did not apply to aeronautical satellite devices would only lead to a deferral of the problem because the European manufacturer of the boards would sooner or later cease to manufacture them.
(e) The problem however did not come into focus in 2006 and 2007 essentially because ADS was unable to sell any significant number of SAT-111s. When the parties did focus on it in early 2008, they did not do so because they were taken by surprise.
(f) I am satisfied that there always were in relative terms significant quantities of SAT-101-boards held by Satamatics at all material times. Mr Chisholm told Mr Karlsen that there were 80 boards available and that he could safely sell SAT-111s; notwithstanding this he only sold one more. There obviously was however a real tension between different people within Satamatics as to who should have first call on them. The tension was between those in charge of servicing and support of the land and marine SAT-101 equipment and those concerned with the SAT-111 project. The problem for both applications was that in time the SAT-101-boards would run out because they were not being manufactured any more; they therefore had to be used for repair or replacement of the land and marine equipment when necessary or for the manufacture of (and possible future support for) the SAT-111s or both.
(g) The fact that they were internally allocated in about February or March 2008 to support for the land and marine-based equipment is not to the point because, as Mr Hatherall said and others within Satamatics also said, either SAT-101-boards would be made available for the SAT-111s to the limited extent likely to be ordered or if substantial orders were made it would then be in Satmatics’ interest to secure a compliant replacement board.
(h) There was no realistic prospect between January and July 2008 of any significant quantity of SAT-111s being actually ordered as such by ADS. I make this finding because historically only 17 of the units were ever ordered and sold and ADS had habitually grossly exaggerated the prospects of sales. I do not mean by this that Mr or Mrs Karlsen were dishonest in this regard but they were hopelessly over-optimistic that each and every query from a customer or an agent for a possible customer would or could realistically lead to sales. The reality is that, although the product appears to have been a good and well engineered one, it did not appeal and had not appealed to the relevant markets; this was largely due to the price compared with other cheaper devices which were not all aeronautical ones. ADS fell into a habit, particularly marked in 2008, of "talking up" every informal or tentative contact with possible customers or agents as heralding a realistic prospect of sales.
(i) Even ADS was not anticipating in 2008 in reality orders for more than one or two SAT-111s. That is clear from the history above. It is also clear that they wholly understood that the supply of the critical SAT-101-boards was by 2008 finite and the reality was, in my judgment, that ADS was pinning its hopes on the introduction and successful marketing of the SAT-221 which was not dependent on components which were in limited supply. That approach was not illogical in circumstances in which a key element of the SAT-111 was or would be considered to be obsolete in that, although sufficient actual units were available to manufacture SAT-111s, clients would be less interested in purchasing something an element of which was no longer being manufactured.
(j) It follows from the above that Satamatics had in 2008 and indeed afterwards comfortably enough SAT-101-boards and other components to manufacture SAT-111s to order in such quantities as were ever foreseeably likely to be ordered.
(k) I accept the evidence of the Defendant’s witnesses that there was no cessation of manufacture of the SAT-111 in 2008 and no decision in that regard on the part of the Defendant until about 30 July 2008 when the letter to that effect was sent to ADS. The fact that no units were actually assembled or manufactured in or after 2008 simply reflected the fact that no orders were submitted by ADS, other than one which was satisfied by the dispatch of an already assembled SAT-111.
In my judgment, the SAT-221 was not, and to the extent that it was developed by July 2008 had not become, a "derivative" within the meaning of the definition of "Product" in the Agreement and Satamatics never became obliged to manufacture and supply the SAT-221 at any stage. There was no obligation as such under the Agreement on Satamatics to produce the SAT-221; it undertook to supply under Clause 3.1 the SAT-111 Products. It was not, forcefully if at all, argued that there was a continuing obligation on the part of Satamatics in effect to develop derivatives and it is not possible to imply or infer such an obligation.
The reality is that, although there had been some limited talk in 2006 of developing something different from the SAT-111 or a new generation of aeronautical tracking devices, that had not been mutually pursued by either ADS or Satamatics in 2006 and 2007. It was only in the early part of 2008 when Mr Karlsen heard about the impending closure of the Aero-C and had met Mr Avvakumov and Scandinavian Avionics that he spoke to Mr Chisholm; that was about SAT-111s and the possible market in Russia. Again, as both before and after, he was enthusiastically optimistic about the possibilities and wanted to know the extent to which Satamatics could cater for the number of sales which he was anticipating (hundreds). The idea about what came to be called the SAT-221 first materially surfaced in late March 2008 after the row about the SAT-101-boards and whether Satamatics should or would set aside such boards against a commitment charge for so doing. ADS was unwilling to do that, which was obviously a choice which they were entitled to make. It was at that stage that Mr Chisholm floated the idea about the use of the SAT-201 and what was to be talked about thereafter as the SAT-221.
Thus it was that the parties came to discuss in detail the SAT-221 at the meeting of 31 March 2008. There was in effect some "give and take" (albeit not in any binding sense) between the parties at that meeting. Satamatics said it would produce the SAT-221 prototype but both parties effectively reserved their position as to whether the SAT-221 project went ahead with both parties able to form a view in the future as to whether from each of their standpoints the project was viable. It was at most an informal "subject to contract" arrangement albeit that it had not even in truth got to that stage.
There certainly was no variation of the Agreement or waiver or abandonment of the provision (Clause 13.4) that any modification to the Agreement had to be by way of a written instrument signed by both parties. There was no threat or statement that in the meantime Satamatics would not produce any SAT-111s ordered in the interim.
Leaving aside estoppel issues, what happened in fact over the following 2 to 3 months is that, as decided at the 31 March meeting, the prototype was developed and from ADS’s side it decided and proceeded on the basis that the sensible and commercial way forward was to promote the SAT-221 to customers, albeit that the greater part of the activity was through Mr Avvakumov. There is no doubt that Mr and Mrs Karlsen anticipated or at least very much hoped that the SAT-221 would go ahead but that was in the context that, other than the production of the prototype, there was no obligation on the part of Satamatics to go ahead with the project, no matter how technically viable it was. They were so convinced however that it was a good idea that it was they who assumed that it was bound to go ahead.
When one therefore comes to analyse the events which led to the worsening in relations between the parties in May and June 2008, it was the insistence from Satamatics (from Mr Bull and Mr Koutrouki) that ADS had to place an order for 10 units in effect before ADS had received an order itself from the Russian clients that led to that state of affairs. As there was no binding contractual commitment on the part of Satamatics to produce a SAT-221 as a Product under the Agreement, all that Satamatics was doing on analysis was seeking to secure commercial viability from its standpoint by securing an order which would cover its costs to date; this approach was, in one sense, tough bargaining because they did not have particular confidence in ADS’ ability to secure orders (based on previous performance) and it was in some financial difficulties themselves. They felt that, if the SAT-221 market was as good as ADS was suggesting, ADS should and could demonstrate its confidence by placing an order for some £20,000 (which was perceived not to be a large amount).
On the basis that and because there was no binding commitment to produce the SAT-221, it was open to Satamatics to take whatever commercial standpoint it wanted to take. If Mr Karlsen did not consider in effect that it was commercially viable going ahead with the project by placing an order and committing ADS to purchase 10 SAT-221s when they got to the production stage, that was his choice. The fact that he considered that the project was commercially viable otherwise is not to the point. He may have felt that Satamatics was behaving unreasonably but again that is not material.
In my judgment, the SAT-221 project had not got to a stage at which it could be properly described as a Product within the meaning of the Agreement. Whilst it could eventually have become a derivative within that definition, it did not become one by the time that the relationship began to founder in June and July 2008. My reasons are as follows:
(a) The production of designs and a prototype does not and did not mean that there was an established derivative. The whole point of producing a prototype is and was as a necessary precursor to a derivative which was capable of being "manufactured or supplied by Satamatics” within the definition. In practice, the prototype is just that and it does not equate and is not intended to equate to a production model, albeit that the final production model may or may not be close to the prototype. The production of a prototype is in a very real sense part of the design stage as opposed to the production stage.
(b) There would and did remain essential things to do following the production of the prototype before the device reached the stage of being considered such a derivative. First of all, it would need to be tested through trials; these were planned by ADS through Mr Avvakumov to be on a Russian helicopter. The whole purpose of the trials was to see that it worked and was effective and in the light of those trials for it to be adjusted and if necessary re-engineered. Indeed even Mr Karlsen accepted in his e-mail of 11 June 2008 that the prototype after the trial could change in the final production version. Secondly, it can not have been the intention of the parties, and it is contrary to engineering common sense, that what was to be "manufactured and supplied" would be the prototype, even if the eventual production model was similar. Thirdly, there would need to be further paperwork and certification following the trials and any adjustments or alterations necessary.
(c) There has been no technical or expert evidence that the prototype would not need to have been altered after the trials (which of course never took place). In this context, it is worth noting that the prototype unit was never even connected or worked on by ADS let alone checked out.
It is strictly speaking unnecessary to decide whether the SAT-221 would have become a derivative capable of being produced to a production standard such that it would be a derivative within the meaning of the word "Product" in the Agreement. It is speculative to make such a finding because there were no trials. If I had had to speculate, I would, tentatively, have anticipated that a version of the prototype would or could well have been capable of becoming a derivative and, subject to that provisional view, I would have preferred the evidence of Mr Koll in this regard; his evidence was in a sense general because he did not and could not sensibly speculate as to what would have happened following the trials. The fact that the SAT-221 would have been a derivative more of the SAT-201 rather than directly of the SAT-101 or SAT-111 would not prevent it being a derivative under the Agreement. The fact that it was a simpler and cheaper unit would not prevent it being derivative. There would be sufficient similarities in the functionality of the proposed SAT-221 prototype to suggest that it would have become a derivative via the SAT-201 of the SAT-111. Essentially, the technology was similar and they broadly performed in the same way, albeit that the SAT-221 prototype had less "bells and whistles" than the SAT-221.
It is first necessary to review or summarise the law relating to the relevant types of estoppel relied upon. Although one could be forgiven for believing that ADS was only relying on estoppel by representation in its pleading, in fact it relied upon promissory estoppel and estoppel by convention as well. As no pleading point is made, I will consider these three types now advanced by the Claimant.
In typical and sensible terms (upon which I would not want to improve) Lord Denning MR described estoppel generically in McIlkenny v Chief Constable of the West Midlands 1980 QB 283 at 316-7:
"The word "estoppel" only means stopped. You will find it explained by Coke in his Commentaries on Littleton (19th ed, 1832), vol. II, s. 667, 352a. It was brought over by the Normans. They used the old French “estoupail.” That meant a bung or cork by which you stopped something from coming out. It was in common use in our courts when they carried on all their proceedings in Norman-French. Littleton writes in the law-French of his day (15th century) using the words “pur ceo que le baron est estoppe a dire ceo," meaning simply that the husband is stopped from saying something.
From that simple origin there has been built up over the centuries in our law a big house with many rooms. It is the house called Estoppel. In Coke's time it was a small house with only three rooms, namely, estoppel by matter of record, by matter in writing, and by matter in pais. But by our time we have so many rooms that we are apt to get confused between them. Estoppel per rem judicatam, issue estoppel, estoppel by deed, estoppel by representation, estoppel by conduct, estoppel by acquiescence, estoppel by election or waiver, estoppel by negligence, promissory estoppel, proprietary estoppel, and goodness knows what else. These several rooms have this much in common: They are all under one roof. Someone is stopped from saying something or other, or doing something or other, or contesting something or other. But each room is used differently from the others. If you go into one room, you will find a notice saying, "Estoppel is only a rule of evidence." If you go into another room you will find a different notice, "Estoppel can give rise to a cause of action." Each room has its own separate notices. It is a mistake to suppose that what you find in one room, you will also find in the others.'
Estoppel by representation is one of Lord Denning’s "rooms". An authoritative exposition of the law is to be found in Spencer Bower Estoppel by Representation, 4th Edition at I.2.2 and I.2.3:
"I.2.2 Under the doctrine of estoppel by representation of fact: where one person (“the representor”) has made a representation of fact to another person (“the representee”) in words or by acts or conduct, or (being under a duty to the representee to speak or act) by silence or inaction, with the intention (actual or presumptive) and with the result of inducing the representee on the faith of such representation to alter his position to his detriment, the representor, in any litigation which may afterwards take place between him and the representee, is stopped, as against the representee, from making, or attempting to establish by evidence, any averment substantially at variance with his former representation, if the representee at the proper time, and in the proper manner, objects thereto.
I.2.3 From this statement of the governing principle of estoppel by representation of fact it may be gathered that the following elements must be established in order to constitute a valid estoppel by representation of fact:
(1) that the alleged representation of the party sought to be estopped was such as is in law deemed a representation of fact;
(2) that the precise representation relied upon was in fact made;
(3) that the representation, or case, which the party is later sought to be estopped from making, setting up, or attempting to prove, contradicts in substance his original representation, according to proper canons of construction;
(4) that such original representation was of a nature to induce, and was made with the intention (actual or presumed) and the result of inducing the party raising the estoppel to alter his position on the faith thereof to his detriment;
(5) that such original representation was made by the party sought to be estopped, or by some person for whose representations he is deemed in law responsible, and was made to the party setting up the estoppels, or to some person in right of whom he claims."
Wilken and Ghaly in the The Law of Waiver, Variation, and Estoppel (3rd ed) summarise the elements more pithily but no less accurately as:
"First, A makes a false representation of fact to B or to a group of which B was a member. Second in making the representation, A intended or knew that it was likely to be acted upon. Third, B, believing the representation, acts to its detriment in reliance on the representation. Fourth, A subsequently seeks to deny the truth of the representation. Fifth, no defence to the estoppel can be raised by A." (Para. 9.02)
It is important to appreciate that the representation must be one of fact. Generally, at least, a representation as to future intentions will not suffice nor will a promise to do something in the future (see Roebuck v Mungovin [1994] 1 All ER 568 (HL) and Argy Trading Co Ltd v Lapid Developments Ltd [1977] 1 WLR 444). This is accepted by Counsel for ADS. It is possible, however, that a representation as to future intentions or a promise to do something in the future could give rise an estoppel of a different sort. A representation that in fact a party’s current intention is a certain one, however, may be effectively a statement of fact, that fact being what at the current time the intention actually is.
So far as estoppel by convention is concerned, Lord Steyn summarised the law in this regard at Paragraph 57 of his judgement in the House of Lords in Republic of India v India Steamship Co Ltd [1997] UKHL 40:
"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: The August Leonhardt [1985] 2 Lloyd's Rep. 28; The Vistafjord [1988] 2 Lloyd's Rep. 343; Treitel, Law of Contracts, 9th ed., at 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention."
Mr Justice Briggs in HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch) considered this dictum and various others and stated at Paragraph 52:
"In my judgment, the principles applicable to the assertion of an estoppel by convention arising out of non-contractual dealings, to be derived from Keen v. Holland, and the cases which comment upon it, are as follows:
"i) It is not enough that the common assumption upon which the estoppel is based is merely understood by the parties in the same way. It must be expressly shared between them.
ii) The expression of the common assumption by the party alleged to be estopped must be such that he may properly be said to have assumed some element of responsibility for it, in the sense of conveying to the other party an understanding that he expected the other party to rely upon it.
iii) The person alleging the estoppel must in fact have relied upon the common assumption, to a sufficient extent, rather than merely upon his own independent view of the matter.
iv)That reliance must have occurred in connection with some subsequent mutual dealing between the parties.
v) Some detriment must thereby have been suffered by the person alleging the estoppel, or benefit thereby have been conferred upon the person alleged to be estopped, sufficient to make it unjust or unconscionable for the latter to assert the true legal (or factual) position."
Finally, the essential elements of promissory estoppel (sometimes known as equitable forbearance) are summarised by Wilken and Ghaly at Paragraphs 8.03 and 8.04:
"There are four [elements]. They are well established. First, one party to a contract or other legal relationship (‘the promisor’) makes a clear and unequivocal representation to the other (‘the promisee’); that representation being intended to affect the legal relations between them. Second, the representation is that the promisor’s legal rights under the contract or relationship will not be enforced or will be suspended. Third, the promisee, to the knowledge of the promisor, in reliance on the representation alters its position to its detriment. Fourth, the promisor now seeks to withdraw from that representation.
Once these elements are made out, the doctrine will operate to ensure that the promisee is not left, as a result of its change of position, in a worse position than before the representation was made. There is, therefore, considerable remedial flexibility dependent on the way in which the promisee has changed its position in reliance on the representation. Thus, if it is possible to restore the promisee to its original position and reverse the detriment on reasonable notice, the doctrine is suspensory of the promisor’s rights and the promisor will be permitted to resile from the representation on reasonable notice. If, however, that is not possible or it would be highly detrimental or inequitable so to do, even after notice, the doctrine may operate as a permanent bar on the withdrawal of the representation."
Equitable forbearance is a defensive doctrine that cannot be used to create new obligations: its ambit is restricted to promises to forgo existing rights and does not extend to promises to create new ones, so that it can be used "as a shield but not a sword". This principle was first articulated in Combe v Combe [1951] 2 KB 215, where the court emphasised that to allow equitable forbearance to create rights would undermine established contract law principles by enabling promises unsupported by consideration to be enforced. It was in this case that Lord Denning explained and perhaps qualified his decision in Central London Property Trust Ltd v High Trees House Ltd, 1947 KB 130, saying that "the principle never stands alone as giving a cause of action in itself” and that "it can never do away with the necessity of consideration when there is an essential part of the cause of action." While it has been said that “swords with a little ingenuity can be beaten into shields” (see Brikom Investments v Seaford [1981] 1 WLR 863) the principle has frequently and more recently been approved (see for instance BP v Aon [2006] EWHC 424 at 268ff).
I do not consider however that any of these forms of estoppel were engaged here. My reasons are as follows:
(a) Each of them runs into the immediate problem arising out of the clear understanding between the parties as from the 31 March 2008 meeting which was that there was no commitment, indeed on either side, to the SAT-221 project. Indeed, the "agreement" on the part of Satamatics to produce the prototype did not reflect some binding agreement let alone variation of the original Agreement. There was or would be no consideration for the production of the prototype as some separate binding agreement (and indeed there is no pleaded case that there was any such agreement). It could not be a variation of the Agreement because there was no signed written instrument by which it could come into effect.
(b) The arrangement, such as it was, by which the prototype was produced was essentially subject to final agreement and to each party being satisfied from their own standpoint that it represented a commercially viable product.
(c) Mr Karlsen essentially decided in and after March 2008 that ADS’ future would better be served by promoting the SAT-221 project because he thought that it could sell well, all things being equal, and that, having "flogged a dead horse" with the SAT-111 for the previous 30 months or more and with new SAT-101-boards not being manufactured any more, there was little point in actively promoting the SAT-111 when there was what he thought was a realistic prospect of a more saleable product coming on to the market.
(d) Mr Karlsen clearly knew about these matters at all material times.
(e) There were no material representations relied upon or otherwise which could form the basis of an effective estoppel by representation. ADS’s Counsel has produced a helpful "Note on Estoppel” which highlights e-mails of 26, 27 and 28 March and 20 May 2008 as well as what was said on 31 March 2008 and in a telephone conversation between Mr Bull and Mrs Karlsen on 19 May 2008. The e-mail of 26 March 2008 (see Paragraph 69 above) did not say that there were no SAT-101-boards. It is very clear that Mr and Mrs Karlsen never had much faith or confidence in Mr Bull who had recently come on the scene and in their view knew little about the avionics business. Mrs Karlsen’s reaction was to go to Mr Chisholm who came back to her on 27 March in effect saying that 30 boards could be set aside; those were obviously available for numbers of SAT-111s which might be ordered at least over the coming few months. Mr Chisholm in the next e-mail made it clear that there were 90 or so in stock and that he was sure that 90 could be made available; the only reason he had suggested 30 is because in his view that was the maximum that might realistically be ever sold.
(f) Therefore, Satamatics was not representing that there were insufficient SAT-101-boards; they were in fact representing that there were more than sufficient number of SAT-101-boards to cover the SAT-111s which might ever realistically be ordered during the lifetime of the Agreement.
(g) It is wrong to say that Satamatics "was not prepared to meet its obligation to supply the SAT-111s unless and to the extent that ADS agreed to purchase [SAT-101-boards] in advance of placing any Purchase Order" (Counsel’s Estoppel Note). As was clear to Mr and Mrs Karlsen, Satamatics was a lot less optimistic about the prospect of sales of the SAT-111 than they were; they were aware that the SAT-101-boards were no longer being manufactured and that there was a finite supply; all that Satamatics was saying was that if ADS wanted to be sure of its supply, there was a price for reserving them indefinitely into the future. The reality was that, absent any notice of cessation of manufacture, Mr and Mrs Karlsen must have known that they did not have to agree to pay in advance and they could simply put the orders in and secure SAT-111s. There was no material reliance.
(h) The e-mails of 27 and 28 March 2011 do not contain any representation from Satamatics that it intended to incorporate elements of the SAT-201 into the SAT-111 or that it intended to supply a product incorporating elements of the SAT-201. The e-mail of 27 March does talk about SAT-201K but that was in the context of an issue about magnets which has nothing to do with the matters in issue in this case. The e-mail of 28 March from Mr Chisholm again picks up the same magnet issue.
(i) In relation to the meeting of 31 March 2008, I find that the representations such as are relied upon to support the estoppel by representation were simply not made in those terms, substantively or at all. I have made my findings as to what happened at that meeting. It is wrong to say that the "representation" that EMS indicated that it would design and manufacture a prototype SAT-221 and provide it to ADS for evaluation was really a representation as such at all. It was simply Satamatics saying that this is what it was going to do; in fact that is what it did do.
(j) As for the representation made in a telephone conversation between Mrs Karlsen and Mr Bull on 19 May 2008, neither of these people was called as a witness. Mrs Karlsen sat in court throughout the trial. Her e-mailed understanding that she had been told by him that SAT-111 was "finished" was countered by his e-mail the following day saying that there were some SAT-111 spares; her understanding was therefore apparently wrong and there was clearly no reliance on this conversation.
(k) The final representation is said to be Mr Bull’s three line e-mail of 20 May 2008 in which he said that there were a limited number of SAT-111 spares available and these were being consumed daily by the existing customer base and that he believed that "it would make more sense to propose" the SAT-221 as "this would be the future supportable product". It is unclear whether this was a material representation at all. There was a finite number of SAT-101-boards available and likely to be available and Mr Bull was simply suggesting that it made more sense therefore to put forward the SAT-221. In the light of where the prototype exercise had got to, this was the best suggestion.
(l) So far as estoppel by convention is concerned, the convention is said to be a shared assumption that the SAT-111 was "finished", that the SAT-221 was to replace the SAT-111 under the Agreement, that ADS should market the SAT-221 and that a prototype would be made available for evaluation including flight trials. There was no shared assumption that SAT-111 was "finished"; ADS knew that there were boards available which could be used to manufacture SAT-111s to the extent ordered and in any realistically foreseeable quantities. There was no common assumption that the SAT-221 would replace the SAT-111 because the parties were and must have been aware that the SAT-221 would only be produced in any marketable form if and to the extent that there was commercial and technical agreement between the parties (and that never ultimately happened). There was an appreciation that ADS was marketing the SAT-221 but with its eyes open that ultimately it might not be available; there is a difference between hope that it would be available to be sold on a commercial basis and an unqualified common expectation that it was going to be. Finally there was of course a common assumption that a prototype would be produced and made available but no more than that; there would still be a need for any commercially available product to be adapted, tested and otherwise reviewed following any trials of the prototype and it was all subject to commercial agreement between the parties as to whether the project was to go ahead.
(m) I do not begin to see how promissory estoppel or equitable forbearance can attach to the facts in this case. I cannot see that there was any representation that Satamatics’s legal rights under the Agreement or relationship would not be enforced or would be suspended. I do not consider that on the facts there was any reliance upon anything which might be perceived as a representation or that the Defendant is withdrawing from any representation. It is said that in effect Satamatics represented or made an election that it would not issue a notice of cessation of manufacture in relation to the SAT-111 on the basis that it would supply the SAT-221. This falls to the ground in the light of my findings as to what the understanding was in relation to the SAT-221, in that, in summary, it was at best an informal "subject to contract" arrangement and both parties knew and were aware at all times that there had to be a commercial discussion between them before any decision was made ultimately to move to commercial production.
It follows from the above that ADS’ case fails on liability.
I turn therefore briefly to the remaining issues. In relation to repudiation, there was no material breach. Even if it could be said that that there was some anticipatory breach of contract in relation to indications that SAT-111s would or could not be produced, that was recovered (so to speak) by the formal notice of the cessation of manufacture on 30 July 2008 which made it clear that that all orders for SAT-111s would be met and that sufficient SAT-101-boards were being set aside to satisfy any orders which might realistically be submitted. There were in fact sufficient boards; unfortunately, there were no orders. In those circumstances there would only have been (if any breach at all) a breach up to the end of July 2008. Even if that was repudiatory, the repudiation was (even on ADS’s case) not accepted before August 2008.
But so far as any repudiation was concerned, I would have found that the repudiation was not accepted. The plea is that it was accepted in effect by conduct in December 2008. An acceptance of a repudiation must be clear and unequivocal. Unless and until the repudiation is accepted the contract continues in existence since "an unaccepted repudiation is a thing writ in water": Howard v Pickford Tool [1951] 1 KB 417. Mere inactivity or acquiescence will not generally be regarded as acceptance for this purpose: Denmark Productions v Boscobel [1969] 1 QB 699. Acceptance is usually done by communicating the decision to terminate to the party in default, although it may be sufficient to lead evidence of an "unequivocal overt act which is inconsistent with the subsistence of the contract": State Trading Corp of India v M Golodetz Ltd [1989] 2 Lloyds Rep 277: see generally Chitty at 24-013.
There certainly can be no words relied upon. Indeed, it did not apparently cross ADS’ mind that it had accepted any repudiation until a late amendment in these proceedings, even though it was advised by solicitors in 2008. One can not infer acceptance from the absence of any new orders for the SAT-111s; there was no obligation on the part of ADS to place orders and the history over the previous 12 months or so did not suggest that there was ever likely to be any significant number of orders in any event. The exchanges between the parties in December 2008, objectively judged, suggested that ADS might still be interested in submitting orders. It continued to pay for airtime under the Agreement going through to 2012 and to seek technical support in 2009 for a damaged unit which, again objectively judged, indicated that ADS still considered that the Agreement was subsisting.
If I had to deal with damages, I would have very substantially reduced the damages. It is difficult to speculate in any detail about what damages I would have awarded in the light of the findings about there being a breach. I was not impressed with the evidence of Mr Avvakumov although I hasten to say that I do not consider that he was being consciously dishonest. What was very surprising was that there was not one document as between him and the people with whom he was dealing in Russia from whom millions of pounds’ worth of orders would supposedly have been secured; he was apparently not even asked to produce any. The absence of any corroboration undermines the reliability of that evidence. I also consider it extremely surprising that Mr Avvakumov never disclosed to Mr Karlsen that he was actually working for himself through a firm called Navigator rather than Scandinavian Avionics; that is odd to say the least. I also found that it was unfortunate that a key element of his evidence only emerged in the witness box, which was that there was a realistic possibility that the Russian legislature or an appropriate agency might impose mandatory requirements for certain aircraft to have satellite tracking devices as standard. Finally, the e-mail traffic between him and Mr Karlsen only identified substantial possible sale figures once the parties were in dispute in September 2008.
Apart from the estimate of Russian sales, the remaining possible sales were supported by vestigial evidence, for instance of the possible sale of 350 units to Taiwan. This was based on some e-mail traffic between a lady called Jasmine Chan of an agency in Taiwan which suggested the possibility of sales to the Taiwanese military; she seems to take some months off in the middle of this e-mail exchange for one reason or another and does not seem to have had any or much influence at the Taiwanese end. Another factor which would have influenced me was the fact that in 2008 and much closer to the time that the parties were in dispute, ADS’ estimates of loss were very much less than they are now.
If I had had to decide what damages to award as a result of a repudiatory breach involving failure to supply SAT-111s and SAT-221s, I would have allowed no more than 100 lost sales and at a much lower profit level than that relied upon. I preferred the evidence of the Defendant’s expert that the profit would have been much lower than the $11,000 per unit; there would have been discounts to secure sales (as there were for the SAT-111 sales), there would have been agency fees (which were not allowed for in the Claimant’s calculations), there would have been additional expenses of marketing (again not allowed for) and, arguably more importantly, the sale price would have been significantly less than the price suggested by the Claimant and its expert. There had historically been a problem with selling SAT-111s at the prices put forward by ADS and there is no real reason to think that the Claimants would have been able to secure even 100 sales unless they reduced their price to deal with both legitimate competition and the sort of "box shifter" competition which they had faced in selling the SAT-111. I would have allowed in the region of US$ 4,000 per unit.
Decision
The Claimant’s claim is dismissed and there will be judgment for the Defendant.