England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		29th January 2004

Mr Justice Langley :

INTRODUCTION
1. The Claimant ("DMA") seeks substantial damages from the Defendants for the alleged wrongful repudiation by the first Defendant ("Pihsiang") of an Agreement dated 6 February 1996 ("the Agreement") by which DMA and Pihsiang agreed that DMA should be the exclusive distributor throughout the UK and mainland Europe of Pihsiang's "entire range of scooters". The "scooters" are intended for use by people with mobility restrictions and are small battery driven vehicles. That is reflected in the sort of price a retail customer could expect to pay today for a new scooter (£850 rising to £4000 plus) and the trade name Pihsiang gave them, "Shoprider" reflecting one of the promoted uses of the scooters, to provide a powered means of access from the home to the shops.
2. The Agreement was expressed (Clause 1) to be for "the initial period" of a "five year term commencing on the date of signing". By Clause 10 it was provided that:

"DMA will endeavour to increase sales year on year. On the expiry of the first five year term of this agreement provided that DMA has discharged its obligations under the agreement and is maintaining a sales level of not less than 5000 units per annum, DMA shall have the right to renew the agreement for another five years on the same basis as herein, except that the amount payable each year under Clause 2 shall be US $20,000. This right of renewal shall extend to all subsequent five year periods on the same basis for as long as permitted by law."

3. The "amount payable each year under Clause 2" by DMA to Pihsiang was expressed to be $221,600 in each of the five years of the initial term. A copy of the Agreement as executed is attached to this judgment together with the side letter by which DMA agreed to pay the five payments of $221,600 in a single sum of $1,108,000 on commencement of the Agreement and similarly to pay the five payments of $20,000 on each five year renewal in one payment of $100,000 on the first day of each five year term. The Agreement provided (Clause 13) that it was governed by English law.
4. The Agreement expressly provided that it was made between DMA, Pihsiang and the second and third named Defendants, to whom I shall refer, as the parties did, as Mr and Mrs Wu. Mr and Mrs Wu each signed the Agreement which recorded in the recital that they also undertook the obligations of Pihsiang under the Agreement and undertook "not to do anything directly or indirectly or omit to do anything that contravenes this agreement". Hence DMA's claims are also made against Mr and Mrs Wu personally.
5. The initial term of the Agreement expired on 5^th February 2001. There are issues as to whether it was validly renewed by DMA under Clause 10. If it was, there is no dispute that by 26 April 2002, when DMA's solicitors wrote accepting Pihsiang's alleged repudiation of the Agreement, Pihsiang was indeed in repudiatory breach by reason of supplying scooters to other distributors in Europe. Indeed it is now known Pihsiang had in fact been doing so since November 2000 and increasingly thereafter.
THE ISSUES
6. The principal issues which arise, as agreed by the parties during the course of the hearing, were as follows. Insofar as pleaded issues are not included it is because they were abandoned. Examples are the implied terms alleged in Pihsiang's defence (paragraph 18) and many of the allegations of breach made by Pihsiang against DMA. The major issues concerning validity of the Agreement were first raised only by amendment to Pihsiang's Defence in September 2003.

1.THE AGREEMENT

(1) Parties

1.1 Are the Second and/or Third Defendants (Mr and Mrs Wu) parties to the Agreement? In particular:

(a) Is the Agreement void as against them on the grounds of non est factum?

(b) Is DMA estopped by representation from alleging that Mr Wu and/or Mrs Wu are individually bound by Pihsiang's obligations under the Agreement?

(2) Construction

1.2 On a true and proper construction of Clause 10 of the Agreement, what are the pre-requisites to renewal by DMA under that clause?

1.3 Without prejudice to the generality of 1.2 above, what is the meaning of the phrase "discharged its obligations" in Clause 10 of the Agreement? In particular (but without limitation):

(a) does this refer to substantial compliance;

(b) is it concerned with material obligations and

(c) does it refer to the obligations in Clauses 1-10 of the Agreement only or also to the "Further Obligations" in clause 11 ?

1.4 Upon a true and proper construction of Clause 11 (and as necessary any other relevant terms) of the Agreement, what relevant or material obligations were placed on DMA in relation to performance?

(3) Scope/variation

1.5 Whether the Agreement was varied by conduct so as to cover both scooters and power chairs within its terms.

1.6 Whether the Defendants are estopped from denying that the Agreement extended to cover both scooters and power chairs.

(4) Validity

(a) Restraint of trade

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

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

1.9 If DMA has not done so:

(a) Can and should the Court sever any part of the Agreement so as to render the remainder of the Agreement valid and enforceable against the Defendants?

(b) Is the Court precluded from applying the restraint of trade doctrine as a matter of EC law and, if so, to what extent and for what period ?

(b) Article 81

1.10 Whether the Agreement (as renewed from time to time or at all) fell or would have fallen within Article 81(1):

(a) did the Agreement have as its "object" the prevention, restriction or distortion of competition?

(b) did the Agreement have as its "effect" the prevention, restriction or distortion of competition?

1.11 If the Agreement was or would have been prohibited by Article 81(1) EC, would it have benefited from exemption under Article 81(3) pursuant to a block exemption regulation. In particular,

(i) Does the Vertical Agreements Block Exemption Regulation 2790/99 apply?

(ii) For the purposes of calculating the relevant market share under that Regulation, what is the relevant product and geographic market in relation to the Agreement?

(iii) Whether DMA's share of the relevant market under the Regulation in the period 1996-2015 was or would have been under or over 30%.

(iv) Does the Exclusive Distribution Block Exemption, Regulation (EEC) No. 1983/83 apply ? If so, did the Agreement fall within it ? What are the consequences if the Agreement failed to fall within it?

1.12 Would the Agreement have benefited from a retrospective individual exemption and/or been judged by the Court to fulfil the conditions laid down in Article 81(3) ?

1.13 If part only of the Agreement was void or unenforceable for violation of Article 81(1), is such a part severable from the remainder of the Agreement?

2.PERFORMANCE OF THE AGREEMENT

2.1 To what extent (if at all) did DMA fail to comply with its obligations under the Agreement? In particular, did DMA breach its obligations under Clause 3 of the Agreement by failing to promote sales to the best of its ability in countries in the Annexe to the Agreement other than the UK?

2.2 Was the effect of any such failure to deprive DMA of the right to exercise its option under Clause 10 of the Agreement to renew the Agreement for a further 5 year term in February 2001?

3.RENEWAL OF THE AGREEMENT/ESTOPPEL/WAIVER

3.1 Did the Defendants waive any such breaches as are established or did the Defendants act, by way of acquiescence or otherwise (including agreement or acceptance by conduct), such that the Agreement was renewed in any event and/or DMA remained entitled to renew the Agreement?

3.2 If, as at February 2001, DMA was not entitled to renew the Agreement, are the Defendants nonetheless estopped from denying either that DMA was entitled to renew and did renew the Agreement under Clause 10 in February 2001 or estopped from denying that the terms on which the parties continued to contract after February 2001 were on the terms of the Agreement as renewed? In particular:

(a) Did the Defendants represent to DMA that they accepted that the Agreement had been renewed?

(b) Did DMA act in reliance or intended reliance upon the statements and conduct of the Defendants or on a common assumption and/or to its detriment and, if so, what (if any) was the legal effect of it so doing?

(c) To what extent, on what basis and to what legal effect did DMA continue to act as distributor for Pihsiang after February 2001?

4.BREACH/REPUDIATION OF THE AGREEMENT

4.1 Did the Agreement terminate on 6 February 2001?

5.DMA's LOSS AND DAMAGE

5.1 Has DMA suffered loss and damage as set out in the Amended Particulars of Claim and Amended Reply and, if so, what loss and damage and to what extent is it recoverable from the Defendants?

5.2 Was any loss and damage proved by DMA caused by (and otherwise sufficiently proximate to) any breach of the Agreement by the Defendants?

5.3 If the Agreement was renewed as alleged by DMA and if it had not been terminated, would DMA have been entitled to renew the Agreement in 2006, or would DMA have been prevented from further renewal (or from claiming any damages by reference thereto) by reason of:

(a) The restraint of trade doctrine; or

(b) further breaches of obligations by DMA?

5.4 Has DMA taken reasonable steps to mitigate any such loss?

6.PIHSIANG'S LOSS AND DAMAGE

6.1 Has Pihsiang suffered loss and damage as set out in the Amended Defence and Counterclaim and, if so, what loss and damage and to what extent is it recoverable from DMA?

6.2 Was any loss proved by Pihsiang caused by (and otherwise sufficiently proximate to) any breach of the Agreement by DMA?

6.3 Has Pihsiang taken reasonable steps to mitigate any such loss?

7. INTEREST

Are DMA and Pihsiang respectively entitled to interest upon any loss and damage which they are entitled to recover and, if so, at what rate and for what period?

7. At the conclusion of the trial, Mr Mill QC on behalf of Pihsiang stated that some of these issues would also not be pursued by Pihsiang. The non est factum defence of Mr Wu was not pursued so that Issue 1.1 relates only to Mrs Wu.
8. It is alleged by Pihsiang that on 6 February 1996 (when the Agreement was signed) Mr Crowe (of DMA) represented to the Defendants that "the Agreement (whether or not renewed) would terminate if John Dalton ceased to be Managing Director of DMA" when in fact the Agreement omitted any such provision. The allegations of misrepresentation which are not pursued by the Defendants are the pleaded allegations (paragraphs 8B and 8C) also said to have been matters represented by Mr Crowe at the same time that "the parties to the Agreement were (only) DMA and Pihsiang"; that Mr Wu "would sign only on behalf of Pihsiang"; that "the Agreement would last only 5 years" and that "any extension or renewal of the Agreement would require the mutual consent of the parties". Those allegations were based on witness statements signed by Mr Wu who also signed a statement of belief in respect of the Amended Defence and Counterclaim in September 2003 in which they first appeared. The only allegations of breach of the obligations of DMA under the Agreement which are relied upon as effective to deprive DMA of the right to exercise its option under Clause 10 of the Agreement to renew it for a further 5 years in February 2001 are the obligations in Clause 3, 11(ii) ("to keep Pihsiang informed of the identity of all sub-distributors appointed by DMA") and 11(v) ("to procure registration of the Shoprider brand names/trademarks" in Norway). It is no longer contended that DMA failed to achieve the 5000 unit sales target in Clause 10.
THE PRINCIPAL ACTORS
9. I should record at the outset that on a number of important issues and events there is an irreconcilable conflict of evidence between the evidence of the witnesses who gave evidence on behalf of DMA and the evidence of Mr and Mrs Wu. For example, there is such a conflict as regards the circumstances and what was said at DMA's premises at Bridgend, Mid Glamorgan, in which the Agreement came to be signed on 6 February 1996 and the circumstances of a meeting at Pihsiang's premises in Taiwan on 6 February 2001 at the time of renewal of the Agreement if it was renewed.
10. DCC plc (DCC) is an Irish company with offices in Dublin and is the ultimate holding company of DMA. DMA is incorporated under the Companies Acts with its main business in Bridgend in South Wales. DCC was founded by Mr Flavin in 1976. Its interests are in healthcare, energy, IT and food. Much of its business is marketing and distribution. It is quoted in Dublin and London. It is a substantial and successful company with a present turnover of some €2 billion. DCC Healthcare Limited, also based in Dublin, was incorporated in 1996. It is a subsidiary of DCC. DCC Healthcare acquired DMA in November 1995 by a share purchase agreement with John Dalton, one of the original founders of DMA, who by 1995 effectively owned the company. Under the share purchase agreement Mr Dalton sold his entire interest in DMA but was to remain as chief executive for 4 years until the end of 1999. Mr Dalton was also entitled to an "earn-out" arrangement for the years ending 31 March 1997, 1998 and 1999 the value of which depended on DMA's net profits in those years. After the acquisition John Dalton was also appointed a director of DCC Healthcare, the company to which DMA reported in the DCC Group. Mr Dalton was subject to certain non-competition obligations after leaving DMA. He wrote on 28 June 2000 tendering his resignation effective 28 December 2000.
11. At the time of the purchase of DMA, DMA's sales came partly (43%) from goods which it manufactured at Bridgend with the balance coming from goods which it bought in including goods imported from Taiwan. Those goods were principally wheelchairs and scooters. The wheelchairs were supplied by a company called Merits Health Products Co. Ltd ("Merits") a company then wholly owned by Larry Cheng. The scooters were supplied by Pihsiang which was then wholly owned by Mr and Mrs Wu.
12. The witnesses who gave oral evidence on behalf of DMA were:

i) Morgan Crowe, the Managing Director of DCC Healthcare Ltd, and a director of DMA (following the purchase) and DCC plc.

ii) Barry O'Neill, Finance Director of DMA from June 1996 to December 1999, Deputy Managing Director until December 2000 and Managing Director since January 2001.

iii) Jim Flavin, the Chief Executive of DCC plc.

iv) Dan Teeters, the chief executive officer of DCC Shoprider Inc from June 1999 until December 2001, an associated company of DMA carrying on business in the USA.

v) Mark Hermolle, Mobility Director of DMA from February 2001. Mr Hermolle had worked for many years prior to joining DMA for one of DMA's major competitors in the supply of scooters shortly described as "Invacare" and also for a short time at another competitor "Sunrise".

vi) Colman O'Keefe, the Finance Director of DCC Healthcare Ltd between April 1998 and September 2001.

vii) Dorothy Parker, the Business Development Manager of DMA who acted in the role of personal assistant to John Dalton from 1995 until he left DMA at the end of 2000.

13. In addition three witness statements served on behalf of DMA were accepted in evidence (with one minor deletion) as such. The statements were from a Mr Morgan who had been employed by DMA since 1972 and is now purchasing manager of the company; Mr Remington Huang, an attorney-at-law with Baker & McKenzie, Taipei, and Mr Henry Chang a member of Baker & McKenzie, Taipei.

Pihsiang

14. Pihsiang was founded by Mr Wu in 1983. It first produced agricultural machines and golf carts. By 1989 Mr Wu had developed the first scooter inspired to some extent by some mobility problems which he had himself endured. By 1995 Pihsiang was exporting in excess of 10000 scooters worldwide. It should be, but is not, easy to be precise about the figures for sales which Pihsiang was achieving. Mr Wu's first statement contains figures but ones which he said in his oral evidence underestimate the extent of sales to Europe in 1995. The figures he stated were 5640 sales in all of which 4760 were UK sales and the balance of 880 sales to other European countries. As will be seen, I accept those figures as correct albeit Mr Wu no longer does so.
15. There is general agreement that Mr Wu is a brilliant engineer and designer and he is rightly proud of the success of Pihsiang. In 1996 he described Pihsiang as "a small private company". Pihsiang was the subject of a public listing in Taiwan pursuant to a prospectus dated 16 March 2001. It was also the subject of a share issue in September 2001 for which a further prospectus was prepared. It is now a substantial company.
16. The witnesses who gave oral evidence on behalf of Pihsiang were:

i) Mr (Donald) Wu, the Managing Director.

ii) Mrs (Jenny) Wu, his wife, and responsible for finance and administration at Pihsiang. Mrs Wu gave her evidence in Taiwanese with the assistance of an interpreter.

iii) John Pitt, an employee of DMA in 1979 and a director from July 1998 until December 2000. Mr Pitt was one of three former employees of DMA who acquired a company called Roma Medical Aids Limited ("RMA") in about February 2001. RMA was also involved in medical supplies. It, too, was based in the Bridgend area. It came to distribute Pihsiang Scooters and still does. Mr Pitt simply left a letter of resignation from DMA in the offices over the New Year period of 2000/2001.

iv) Simon Dalton, John Dalton's son and employed by DMA as Product Director. Simon Dalton announced his intention to leave DMA in December 2000 and he left in mid-December. He joined Mr Pitt and Mr Harmar Roberts in the acquisition and operation of RMA. Mr Roberts himself did not give oral evidence but did provide a witness statement which was accepted on the agreed and sensible basis that there was nothing to be said for repeating the cross examination of Mr Pitt and Mr Simon Dalton in his case. Mr Roberts' departure from DMA was effected in the same way as Mr Pitt.

v) Su-Chin Yang, a director of and small shareholder in Pihsiang. She gave evidence relating to a Pihsiang Board Meeting held on 30 January 2001. So, too, did Yu-Wen Wu who acted as a representative of another shareholder, China Motor Co. Both gave evidence in Taiwanese with the assistance of an interpreter and by video link from Taiwan.

vi) Egbert de Groot, a director of "Practicomfort" a consumer sales organisation in the Netherlands. In May 2002 Practicomfort was asked by Mr Wu to "take care of the distribution of Shoprider in mainland Europe".

17. A number of witness statements were also served on behalf of Pihsiang but with one exception I see no need to refer to them. The exception is John Dalton. Two statements by him were served. The first was dated 7 September 2003. The second was dated 31 October 2003. Mr Dalton did not give oral evidence.
THE WITNESSES
18. As I have said, there are important conflicts of evidence in this case. There is even a conflict about how well Mr Wu could speak and understand English in 1995 and thereafter and about Mrs Wu's understanding of the language. In general I found the witnesses called on behalf of DMA to be straightforward, consistent and truthful. Their evidence was also consistent with and supported by the documents. Their expressed concern at what they unhesitatingly described as lies by Mr Wu was, I think, entirely genuine and not in any way contrived. The particular matters involved will be apparent from my consideration of the facts which follows.
19. In contrast I found the evidence of both Mr and Mrs Wu to be evasive and untruthful on a number of matters of importance. At the time of the Agreement I think both had their eyes on the prize of $1.108m. As time went by and Pihsiang prospered both came to think the Agreement to be one-sided. The relationship was also severely and understandably soured at an early stage by DCC's acquisition in 1996 of a 45% shareholding in Merits. Mr Wu viewed Merits and Larry Chang with considerable distaste and from about 1996 Merits competed with Pihsiang in producing scooters for the US market. It is important to record, however, that at no time has it been any part of Pihsiang's case that DCC's relationship with Merits was itself a breach of the Agreement. The departure of John Dalton from DMA at the end of 2000 when the five year term of the agreement was shortly due to expire was another factor which I think influenced Mr Wu. It is ironic in the context of some of Pihsiang's complaints about how the agreement came to be made and DMA's performance under the agreement that Mr Wu got on well with and respected John Dalton and his abilities. John Dalton, in contrast, is on record as thinking Mr Wu to be "slippery". It is to a large extent accepted, and to the extent it is not, I find, that throughout the period 1996 to 2000 John Dalton not only remained in effective control of DMA's business but continued to work for DMA just as hard as he had ever done when he owned it. The "earn-out" of course made it in his interests to do so.
20. I have no doubt that Mr Wu's understanding of English was good at all material times. The great majority of his customers have always done business with him in English. He is not the sort of man who would fail to make himself understood or fail to understand anything important in a commercial context. Nor do I begin to accept his evidence that all matters of finance, listing of shares and the like were the sole responsibility of his wife and not matters with which he was concerned or about which he could accurately answer questions. I am sure Mr Wu kept a close eye on everything to do with Pihsiang and that he would discuss any matters of importance with his wife and she with him. That said I do not doubt that Mrs Wu's responsibilities were as she described them nor do I doubt that her abilities in the English language are limited. No one suggests that Mrs Wu would converse in English but it is suggested that she was able to understand spoken English and she was seen taking notes when English was being spoken in February 2001. Having seen her give evidence with the assistance of an interpreter I formed the impression that as often as not she had indeed understood the substance of the questions when they were asked in English. She is an acute and sophisticated woman.
21. I should add that despite the circumstances concerning their departure from DMA and the acquisition and operation of RMA, I think both Mr Pitt and Mr Simon Dalton gave their oral evidence with a candour which was lacking in their witness statements. That said their evidence about DMA's shortcomings in performance of the Agreement (in effect their own and John Dalton's shortcomings) was I think exaggerated and conditioned by their present loyalties.
22. I also have total confidence in the evidence given by Mrs Parker in every respect and in particular about the timing and involvement of John Dalton in the plans to establish RMA. Mrs Parker was a transparently honest and accurate witness. In particular it is her evidence that John Dalton, his son, Mr Pitt and Mr Roberts were first planning to form a new business in about July 1999; that in December 2000 John Dalton was in frequent contact with the owner of RMA; and that on 28 December John Dalton spoke to Mr Wu on a speaker phone in her presence and told him that Simon, John Pitt and Harman Roberts were leaving DMA to join a new business. Mrs Parker said Mr Wu "did not seem surprised by this" and "responded by saying I'll supply Simon".
23. Despite the denial by Mr Dalton and the owner of RMA in written statements of these events I repeat that Mrs Parker was a transparently honest witness in whose evidence the court had complete confidence.
THE EXPERTS
24. Expert evidence was given in three disciplines:

i) Economics. The witnesses were Philip Burns called by Pihsiang and Derek Ridyard called by DMA. Because of the late amendment of Pihsiang's case to raise competition issues it was rightly agreed that Mr Burns should give evidence first as he did. Mr Burns' report is dated 17 September 2003. Mr Ridyard's report is dated 10 October.

ii) Scooter Market. The main purpose of this evidence was to establish forecasts of future sales to enable quantum issues to be addressed. The evidence also had some relevance to the competition issues. The experts were Dr Peter Harrop called by DMA and Tim Clay, then a consultant working on behalf of Frost & Sullivan, called by Pihsiang. Dr Harrop prepared reports dated 17 June, 4 July and 10 October. Mr Clay prepared reports dated 17 June and 15 July. I refer to these reports as Harrop 1, 2 and 3 and Clay 1 or 2 as the case may be. Harrop 3 was in response to Mr Burns' report.

iii) Forensic Accountancy. The main purpose of this evidence was to address the quantum of the claim and counterclaim. John Ellison, a partner in KPMG, was called on behalf of DMA. Richard Bolton a partner in PKF was called on behalf of Pihsiang. Mr Ellison prepared reports dated 9 April, 27 June and 11 November. Mr Bolton prepared reports dated 9 April, 18 July and 6 November. I shall refer to these reports as Ellison 1, 2 or 3 and Bolton 1, 2 or 3 as the case may be. Bolton 3 was only produced in the course of the hearing as was Ellison 3 in response. In addition the accountants made two joint statements dated 28 March and 24 October 2003.

THE MAKING OF THE AGREEMENT
25. In 1995 Pihsiang scooters were distributed in the UK by 3 companies, DMA, Shoprider UK and Keep Able Ltd. They were also distributed through other outlets in Europe including Practicomfort in the Netherlands. The agreement for the sale of John Dalton's interest in DMA to DCC Healthcare was concluded on 10 November 1995. In early December 1995 John Dalton was chasing Mr Wu to discuss "the exclusive agency for the UK" for DMA. By 14 December he was reporting to Mr Crowe that he had spoken at length to Mr Wu who was "very keen to offer the exclusive agency both for the UK and the EEC and other European Countries". But Mr Wu's price for the exclusive agency was an up-front payment of $1m "to fund his expansion programme". Mr Dalton was very keen on the prospect. Mr Crowe was much less keen. Mr Crowe said, and I accept, that it was unheard of for a distributor to pay such a sum (or indeed any capital sum) for an exclusive distributorship.
26. Mr Crowe's concerns were reflected in a letter from Mr Dalton to Mr Wu dated 14 December 1995. Mr Dalton said "the agreement will however be dependent on many conditions" but the three main points would be assurance about the financial state of Pihsiang, assurance that Mr Wu would continue to be fully involved with Pihsiang and watertight guarantees to prevent any sales into the UK other than through DMA. Mr Dalton wrote again to Mr Wu on 19 December emphasising that "under the agreement" DMA's fundamental obligations would be to "maintain a diligent sales and marketing programme … and to refrain from distributing competing products" and Pihsiang's fundamental obligations "would be to maintain an efficient supply of products to DMA which would be competitive in price, quality and design and to refrain from supplying any competing products in the relevant territory, either directly or indirectly". The letter also stressed that DMA would "require that the arrangement be very long term" putting forward the proposal that "other than in the case of a fundamental breach of obligations by either party" there should be an initial five-year term followed by a notice period of not less than a further five years and an option for DMA to renew the agreement for a payment of $100,000. It also said

"We would wish to be fully satisfied with regard to the effectiveness on a continuing basis of our exclusivity and our protection from parallel importing. In order to achieve this in a satisfactory way it would be necessary for the territory to be the United Kingdom and the rest of the E.U."

27. DMA continued to press Mr Wu. Mr Dalton wrote again on 27 December. Mr Wu wanted an increase on the figure of $1m. He dealt with the matter on the telephone. Mr Wu told Mr Dalton that Pihsiang's total sales in Europe including the UK were 8000 units. In fact the evidence and correspondence shows that was a substantial over-statement. Mr John Dalton says in his witness statement and this letter supports him, that although his primary aim was to seek protection for the UK market (using Europe as a buffer zone against parallel imports) he was also "keen to grow sales of scooters in Europe". The letter referred to legal advice that the only way to achieve exclusivity in the UK was to be exclusive for the whole of Europe and to Mr Dalton's belief that "we can increase sales for you throughout Europe in addition to the UK".
28. On 5 January 1996 Mr Dalton wrote again to Mr Wu to confirm "our final offer" of $1,108,000 with all other details as in his previous letters. This letter set out the European countries to be covered by the agreement (which eventually became the Annexe to the signed agreement) and stated the intention of DMA to increase sales in all countries "although to be quite honest there are some countries which do not purchase scooters from us. We will of course seek to appoint distributors in all European countries…."
29. Mr Simon Dalton said the list of countries came from a road atlas and was prepared "for the sole purpose of eliminating any possibility of scooters finding their way into the UK through Europe". It seems his father would not have agreed and his father would know better.
30. It is clear from the documents that at least by 8 January Mr Crowe was alive to the need for Mr Wu personally to be a party to any agreement. He said, and I accept, that DMA was aware that some intellectual property rights for Pihsiang scooters might be the personal property of Mr Wu and making him subject to the same obligations as Pihsiang was a way of avoiding the need for due diligence on such matters. Mr Crowe prepared a draft Heads of Agreement which Mr Dalton sent to Mr Wu on 8 January. The draft clearly stated that Mr Wu was to undertake personal obligations. There was no mention of Mrs Wu. It also provided for an initial term of five years, five years' notice of termination thereafter and an option for DMA to renew the agreement on payment of $100,000. In effect the Draft provided for a ten year term and one further five year renewal. It also required verification of Pihsiang's existing sales volumes in Europe other than the UK. Mr Wu said in evidence that he did understand that the Draft sought to impose personal obligations on him but he "disagreed" with that.
31. Mr Crowe also worked on some figures to estimate the profit and working capital forecasts for DMA if an agreement was concluded. He was concerned to see if Mr Wu could be persuaded to give some credit period on orders so as to improve the cash flow exposure. Mr Wu had always insisted on no shipment before payment.
32. Again Mr Dalton had to chase Mr Wu for a response. The documents show the response came on the telephone. There is a fax from Mr Dalton to Mr Crowe sent on 17 January in which Mr Dalton says in manuscript he has "just spent an hour on the phone with Donald" and "these are the points he would want included in the agreement". The "points" had been typed up from Mr Dalton's longhand notes. They do not include any personal obligations on Mr Wu; they provide for only a five year term and for renewal by "mutual negotiation"; they extend to "any" of Pihsiang's "medical (invalid) products" and not just scooters; they require DMA to supply sales and service literature and after-sales service and to promote sales in all European countries; they require DMA to pay on the date of shipment "or later if possible by agreement between the parties"; they require Pihsiang to sell to DMA "at the lowest and most competitive prices" and include a provision that "this agreement is dependent on Donald Wu continuing to be President of Pihsiang… and Mr John Dalton continuing to be Managing Director of DMA…"
33. Despite the obvious fact that these "points" are in general commercially more beneficial to Pihsiang than those in the Agreement signed later on 6 February and that they resemble at least some of the matters which Mr Wu says were represented to and understood by him at that time, in his oral evidence Mr Wu denied that they accurately reflected what he had discussed with Mr Dalton. His evidence was that he had only told Mr Dalton that he wanted a very simple five year agreement. I am quite satisfied that Mr Wu is wrong about this. I can see no reason why Mr Dalton should prepare a false document let alone refer to an hour-long telephone conversation with Mr Wu if it had not occurred. Of course, as Mr Wu no doubt appreciated, if, as I find, the conversation did take place as Mr Dalton recorded it must follow that Mr Wu had read or at least understood what was then being sought by DMA and was well capable of discussing it in English. Mr Dalton (like everyone else at DMA) speaks no Taiwanese. On the other hand, as will appear, I do accept that Mr Wu was keen that any agreement should be as short and as simple as possible.
34. Indeed Mr Dalton wrote on 19 January to Mr Wu referring to their "long telephone conversation of yesterday" and saying that there was "only one major point to be resolved" which was renewal after the initial five year period. The letter expressly proposed a clause giving DMA an unqualified right to renew "on the expiry of each five year period". It concluded by seeking confirmation of Mr Wu's visit to DMA in the week beginning 5 February "in order to bring the matter to a conclusion. At that stage we would define our agreement in a legal document which we would keep as brief and as simple as possible".
35. It is apparent from some notes on a copy of Mr Dalton's fax to Mr Crowe that DMA was alive to the obvious commercial danger of tying the distributorship to Mr Dalton's continued role as Managing Director of DMA. Granted the terms of Mr Dalton's contract and earn-out, DMA would have been commercially naïve to agree to such a provision. Mr Crowe is not, in my judgment, commercially naïve.
36. The final exchange between Mr Dalton and Mr Wu took place on 25 January. Mr Dalton had done some work on Mr Crowe's draft because Mr Crowe was away on holiday at the time. Mr Dalton told Mr Wu that he had met with "our lawyers" (in fact the evidence is that neither party had by then referred to lawyers) and had been trying "to simplify the agency agreement". The fax letter enclosed a draft agreement which Mr Dalton said was what he thought should be drawn up in time for Mr Wu's visit. It is this draft (Mr Dalton's draft) which Mr Wu said was what he thought he was coming to the UK to sign. Indeed Mr Dalton informed DCC before his visit that Mr Wu seemed to be in full agreement with it.
37. Mr Dalton's draft was substantially similar to the contents of his fax to Mr Crowe sent on 17 January. It included, however, certain personal obligations on Mr Wu, payment on shipment "or later if possible by agreement", dependency on the continuing roles of Mr Wu and Mr Dalton and an unqualified perpetual five year renewal clause on payment of $100,000 provided DMA had "conformed to this agreement and increased sales".
38. Mr and Mrs Wu arrived in Bridgend on the evening of 5 February. The accounts of how the agreement came to be signed the next day could hardly be more different.
39. Mr Crowe and Mr Dalton were the participants for DMA. Both Mr and Mrs Wu were present. It is Mr Crowe's evidence that he had with him a further Draft Agreement (now seen and amended by DCC's solicitor) which was not only fully discussed at the meeting but also faxed to and back from Dublin to be typed up with changes which were made and agreed. Mr Crowe said the meeting had gone on for some hours starting at about 9 in the morning and Mr Wu frequently broke off to discuss matters in Taiwanese with Mrs Wu. The documentary evidence lends credence to this account. There are drafts of the agreement in the papers with both handwritten and typed amendments on them. The final version was faxed back at 3 o'clock in the afternoon. These drafts show that at all times the draft was worded not only to impose personal obligations on Mr and Mrs Wu but also to be signed by them personally. It was also worded to provide payment by DMA within seven to ten days of shipment of scooters from Taiwan. What became Clause 10 went through a number of drafts. It appears that the originally proposed criterion for DMA's right to renew after the first five years was that DMA had "discharged its obligations satisfactorily under the agreement and is maintaining a sales level of not less than 70% of sales … prior to the commencement of the agreement". The criterion was then changed to the final wording ("endeavour" to increase sales year on year and maintain a sales level of 5000 units a year). The original draft also expressly provided for no further payments of $100,000 after the first renewal. That was deleted. Other amendments were made some of which could be said to favour Pihsiang, others to favour DMA and others to be matters of drafting.
40. Mr and Mrs Wu's account is that they were collected from their hotel in Bridgend by Mr Dalton quite late in the morning as Mrs Wu was suffering from jet lag. They were taken to and shown round the factory and then taken to meet Mr Crowe. Mr Crowe produced the Agreement saying that was what Mr Wu wanted, and, really without much more, both of them had signed it. Mr Wu had thought Mr Crowe was referring to the draft sent on 25 January. Mr Crowe had told Mr Wu that Mrs Wu was only to sign as a witness, something he had then passed on to her. Mr Crowe had also assured Mr Wu the Agreement was only a five-year agreement which could be extended by further agreement. There was no negotiation at all about the 5000 unit figure or indeed anything else. He did not know what he was signing and did not read it. "Mr Wu was therefore led to understand" (to quote paragraph 36 of Pihsiang's Closing Submissions) that the Agreement would be terminable if John Dalton left DMA because that was what the 25 January draft had provided.
41. In my judgment Mr Crowe's account of the meeting and making of the Agreement is wholly to be preferred. It is supported by the documents and in particular the drafts; it is also notable that John Dalton was present throughout but says nothing of any substance about the meeting in his witness statements save that the 5000 unit target figure was indeed included at the request of Mr Wu. It was of course Mr Dalton who would continue to be working with Pihsiang. It is a serious allegation against Mr Crowe that he deceived Mrs Wu into signing by saying she was only to do so as a witness. I am sure he said nothing of the sort. Indeed I accept his evidence that he explained that the reason he wanted Mr and Mrs Wu to sign personally was that it was not clear what their intentions regarding the ownership of Pihsiang would be and DMA was not entirely sure what rights were assigned to them personally or were owned by Pihsiang. Whatever he may now say I am quite sure Mr Wu would never have signed (twice) and initialled the Agreement as he did without being satisfied about its contents; and I am also sure that he would have satisfied Mrs Wu who would have insisted on being satisfied about its terms before she signed. Moreover the Agreement contained little of substance which had not been in earlier drafts. I can think of no good reason why Mr and Mrs Wu should not have agreed to the personal obligations which were plainly stated especially if it obviated the need for some due diligence. They each owned 50% of the shares and were, as Mr Wu agreed, equal partners in Pihsiang's business. Mr Wu could offer no explanation as to why he signed twice. The renewal provisions in clause 10 had been seen by him for some time before he came to Bridgend. The minimum sales commitment of 5000 units was new and must have been discussed at the meeting. It, of course, forms part of the renewal clause. I am also quite sure that Mr Crowe said and implied nothing about Mr Dalton remaining Managing Director. To have done so would have been contrary to his expressed requirement for a long-term agreement, naïve, and contrary to the terms of Clause 10. I regret to say that I find both Mr and Mrs Wu were wholly untruthful in the evidence they gave about the meeting. It is to be noted that, with the exception of the payment terms (Clause 8) and the performance of some of the "pre-conditions" in Clause 12, Pihsiang complied with and made no complaints about the terms of the Agreement let alone the matters sought to be raised in these proceedings, either at the time or later. Indeed the exchanges following the making of the Agreement cannot be reconciled with the evidence of Mr and Mrs Wu about what was said and how it was made. Although there was no direct evidence about it, the probability is that the Wus took a copy of the final Agreement away with them from Bridgend and back to Taiwan. A copy was disclosed by Pihsiang in the course of the proceedings.
THE PERCEIVED BENEFITS OF THE AGREEMENT
42. DMA's views of the Agreement are apparent from a letter and enclosure sent by Mr Crowe to Mr Dalton on 13 February 1996. Mr Crowe noted that the 5000 unit target was considered "undemanding". Pihsiang's scooters were considered to be the best in the market and competitively priced. "The leaders in the market" were thought to be Sunrise, Electric Mobility and Pride. Four other companies were said to have "a meaningful presence". On Mr Wu's figures Pihsiang had a 10% global market share and was itself growing at a rate of 30% a year in a market with strong growth.
43. The note recorded the rationale of the Agreement in these terms:

"DMA has been trading with Pihsiang for four years …. DMA has enjoyed good success to date in the UK market with Shoprider scooters, although it has suffered from the split distributorship arrangements maintained by Pihsiang. DMA believes that under the exclusive distribution agreement now proposed it will be able to bring greater order to the market and improve its margins. DMA's objective is to achieve the No 1 position in the European scooter market over time."

44. As will be seen, when Pihsiang came to describe the rationale of the Agreement in a Prospectus issued in March 2001 it did so in much the same terms. On the basis of various assumptions about sale volumes, costs and margins DMA estimated "the payback period" for its investment in the agreement to be 1½ years in cash terms and 10 months in profit and loss terms.
COMMENCEMENT OF THE AGREEMENT
45. Once the Agreement was signed DMA, through accountants in Taiwan, set about the "due diligence" reflected in the "pre-conditions" in Clause 12 of the Agreement. DMA also sought to confirm the numbers of scooters exported by Pihsiang to each European country in the year 1995.
46. Mr Wu was not keen on providing much of this information. But he was not to get his $1.108m until DMA was happy. By 28 February Mr Wu had told Mr Dalton that sales in Europe including the UK in 1995 were 6800 units of which the UK share was 5100 units. That was, as Mr Dalton pointed out to Mr Wu in a fax dated 6 March, a lower figure than the 7500 to 8000 units Mr Wu had told DMA in the February visit. Although Mr Wu denied in his evidence giving the higher figure I am sure he did as Mr Dalton was quite open in referring to it and Mr Wu writing in English in response apologised for not giving the right figure before.
47. At this time something of an impasse was reached as Mr Wu was not prepared to provide the numbers of sales to each European country. Mr Dalton was keen to go ahead in any event. As he put it in a fax to Mr Crowe "if we don't have exclusivity our gross margins will be eroded and instead of fighting the likes of Sunrise Medical and Booster we will be fighting a price war with everyone in the UK handling the Shoprider range." However on 7 March Pihsiang provided further figures showing sales of 5100 in the UK and 1665 in Europe with separate figures for the six other European countries in which sales had been made.
48. In his first witness statement (dated 20 March 2003) Mr Wu, relying upon a document he attached to the statement prepared by an independent Government organisation, said that by 1995 Pihsiang was already exporting over 10,000 units to Europe. He corrected that evidence in answer to Mr Mill when he started his oral evidence by saying the total figure referred to worldwide sales. The European figures he produced and said were accurate showed sales of 5640 of which 4760 were UK sales leaving 880 sales to other European countries. Other figures also appended to his statement showed an even lower (595) figure for other European sales. Nonetheless in evidence Mr Wu sought to resile from the figures on the basis that they were not reliable as they were customs figures and in effect the customs often muddled up what goods were being exported. I do not accept this. Mr Wu appreciated all too well when he gave evidence that the figure was even lower than that he had provided to DMA in March 2001 and, of course, that the lower the figure for sales in 1995 the better would DMA's sales figures appear over the first 5 years of the Agreement. I see no reason at all to reject the statement of truth in Mr Wu's first statement on this matter (save as to the basis of the total figure). Where Mr Wu can be said to have made a statement against his own interest, as with most witnesses, it can be treated as likely to be accurate. In Mr Wu's case I am sure that is so. Pihsiang has produced no documents (such as invoices) to support a higher figure and Mr Bolton himself understandably adopted the figures shown in Mr Wu's statement and attachment in Bolton 1.
49. Mr Dalton sent a fax dated 25 March 1996 to Mr Wu. DMA was "ready to go" and Mr Dalton set out the steps DMA had taken and was taking to promote sales. There is no need to refer to the steps relating to the UK as no complaint is made about DMA's performance of the Agreement in the UK. "Promotion outside UK" included contacting existing Shoprider clients and attending trade fairs and exhibitions (some already reserved). In contrast to the UK there was no reference to new sales or service literature. Mr Wu did not respond on this.
50. On 11 April Mr Dalton wrote again to Mr Wu to confirm that "the conditions in the Agreement which was signed on behalf of Pihsiang and DMA on 6^th February 1996 have now been satisfied" and to say that the payment of $1.108m would be made the next day. It is clear from the terms of this letter that Mr Dalton and Mr Wu had been discussing the terms of the Agreement and in particular the payment term in Clause 8. Mr Wu replied on 12 April thanking Mr Dalton for "the good news". But he raised "another few things … before we settle down the exclusive distributorship agreement". The only one of those points of any relevance to the Agreement was the payment term. Mr Wu said Pihsiang's accountant had insisted on payment before shipment "otherwise we will go bankrupt". The letter was a plea for help and its terms are not consistent with the present allegation that Mr Wu had been misled as to the terms of the Agreement or misunderstood them. Mr Dalton's response, the same day, again expressly referred to Clause 8 of the agreement "signed by all of us" but as a gesture of goodwill agreed to pay as soon as the Bill of Lading was faxed. Mr Wu, however, persisted, saying "if you think we have already signed the agreement then I think maybe we should resign the new agreement on this point". Mr Dalton again responded expressing sadness and saying "as you know when we finalised our agreement during your visit we all agreed that DMA would pay you 7-10 days after shipment". On 13 April he wrote again to Mr Wu. The letter began by saying it was "both unusual and most unethical to change an agreement once it has been signed by all parties. In February four of us sat down and worked out an agreement which was acceptable to all of us". The 'four of us' were plainly Mr Crowe, Mr Dalton and Mr and Mrs Wu. Mr Wu's response the same day was an apology, to raise "another few things", and to repeat the suggestion that "we have to rewrite the agreement" on the payment terms. On April 15 Mr Wu wrote again, rejecting another payment proposal from Mr Dalton and referring to DMA's strength in marketing as a reason why "we did not emphasize too many units been signed on the draft agreement when we were in the UK". In the end, Mr Wu prevailed.
51. All these exchanges are flatly inconsistent with Mr and Mrs Wu's case about the February meeting.
52. Finally, on 22 April, the payment of $1.108m was made. It was plainly made under the Agreement and received by Pihsiang in recognition of the Agreement.
53. Once the exclusive distributorship was announced and in force there was unsurprising unhappiness on the part of those who had previously been able to source Shoprider scooters direct from Pihsiang. They now had to buy from DMA at a price reflecting DMA's profit margin. That was true both in the UK and for Practicomfort in the Netherlands. Keep Able and Shoprider UK, by September 1996, had found other sources of scooters to market. Practicomfort negotiated a special price with DMA on the basis that shipments would be made to them direct from Taiwan so reducing DMA's costs of supply. Practicomfort supplied different types of scooter, not only the Shoprider brand.
THE TERMS OF THE AGREEMENT.
54. Power Chairs. The Agreement "relates to the exclusive distributorship by DMA of Pihsiang's entire range of scooters". Other clauses refer repeatedly to "scooters". Nowhere is the expression defined. At the time Pihsiang only manufactured scooters so-called. In 1997 Pihsiang developed what were called power chairs. The questions arise whether power chairs were subject to the Agreement as such (or by later acceptance) and whether they form part of the relevant market for competition law considerations. The answers to the questions are not necessarily and indeed in my judgment are not the same. When the issue of inclusion in the Agreement was expressly addressed between the parties it was not (as will be seen) pursued to any conclusion. As a matter of construction of the Agreement alone I do not think power chairs can be brought within its terms. There can be no real doubt, whatever their many similarities, that "power chairs" are not and are not described as "scooters": they have a different steering mechanism (joystick/handlebars) and generally a shorter wheelbase. Unusually, perhaps, for an Agreement of this sort it contains no provision for related or newly developed products.
55. Clause 2. Read with the side letter, the payment by DMA of $1.108m for the "right of exclusive supply" was not refundable unless Pihsiang was in "fundamental breach" of its obligations.
56. Clauses 3 and 5 set out (together with the opening words of Clause 10) the basic obligations on DMA: to sell only Pihsiang scooters; "to promote sales to the best of its ability in the UK and all countries in the schedule"; only to sell the scooters under Pihsiang's brand names; to provide sales and service literature, an after-sales service, product liability insurance, and to "attend all major European exhibitions to promote sales". The basic restriction on DMA, therefore, was that it could only sell Pihsiang scooters. But it could sell them at any price to any third party it wished.
57. Clause 3, it is agreed, contains a "best endeavours" clause: DMA will "promote sales to the best of its ability in the UK and all countries in the schedule". I agree with Mr Mill that the obligation is to be considered in the context that DMA was an established, well capitalised and skilled distributor of medical aids but also, I think, in the context of the commercial reality that the mobility scooter market was concentrated largely albeit still developing in the UK, Holland and Germany and many of the scheduled countries had no established market and were unlikely to develop one for some time. Mr Mill referred to two authorities. In Sheffield District Railways Co v Great Central Railway Co [1911] 27 TLR 451 the Great Central Railway Co had agreed by an agreement which entrusted the working of the Sheffield railway to the company to "use their best endeavours to develop the through and local traffic" of the Sheffield railway. Lawrence J said:

"We think best endeavours means what the words say: they do not mean second best endeavours …. They do not mean that the limits of reason must be overstepped with regard to the cost of the service; but short of these qualifications the words mean that the Great Central Railway Company must, broadly speaking, leave no stone unturned to develop traffic on the Sheffield District line".

58. In IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335 (CA) the Court considered a clause under which a purchaser of land undertook to use its best endeavours "to obtain" planning permission and not to withdraw an application for permission without the seller's written consent. The court held that the obligation extended to the pursuit of an appeal against a refusal of permission. Buckley LJ at page 339 said the words required the purchaser "to do all he reasonably can to ensure that planning permission is granted" and so if an appeal "would have a reasonable chance of success" it should be pursued. At page 343, he also said that "the formula" which commended itself to him was that the covenantors were bound to take all the steps in their power which were capable of producing the desired result "being steps which a prudent, determined and reasonable owner, acting in its own interests and desiring to achieve that result, would take".
59. The context of the present obligation is "to promote sales" (Clause 3) and "to increase unit sales year on year" (Clause 10). Increased sales, provided they earned or commercially could reasonably be expected in the future to earn a reasonable return, were in the interests of both DMA and Pihsiang. I agree with Mr Mill that where appropriate the obligation could require DMA to invest and to take the risk of success or failure but only where there was a reasonable prospect of commercial success.
60. Clauses 4 and 6 set out the basic obligations on Pihsiang: "not to sell invalid scooters to any UK or European distributors or customers either directly or indirectly"; not to allow any of its distributors outside Europe to sell its scooters into the UK and Europe; to maintain "a reliable supply of scooters at all times at the most competitive prices" with the prices paid by DMA to be "the lowest charged by Pihsiang to any of its distributors or customers throughout the world for a comparable product".
61. Thus the basic restriction on Pihsiang was not to allow any sales into Europe save to DMA. The obligation to charge its "lowest prices" could, I think, have proved a source of dispute but was no doubt intended to ensure that DMA was able to compete on price in the market in the interests of both parties.
62. Clause 7 contained a further restriction on Pihsiang and Mr and Mrs Wu. In the event that they sold the business or brand name the terms of sale had to require the buyer to assume their obligations under the Agreement.
63. Clauses 8 and 9 required DMA to pay for the scooters within 7 to 10 days of shipment and Pihsiang "to replace all defective parts free of charge, within a period of fifteen months from the date of shipment from Taiwan other than where the defect results from abuse or normal wear and tear". The payment terms were varied as I have recorded. It is not suggested that DMA ever failed to pay as agreed. Pihsiang's obligation to replace defective parts free of charge was the basis for the inclusion by DMA in its quantum calculation of the cost of warranty claims. In the event that claim was not pursued.
64. Clause 11 sets out "further obligations of DMA". Its location and the wording of this introduction suggests, I think, some reduced significance in what follows from what has gone before. The substance of the provisions support that. They are matters of which Pihsiang would either be aware and be able to pursue should it wish to do so or which are left to DMA to determine. Persistent breach despite complaint might be more serious. The only two provisions of significance to the issues are DMA's undertaking in Clause 11(ii) "to keep Pihsiang informed of the identity of all sub-distributors appointed by DMA" and in Clause 11(v) "to procure registration of the Shoprider…brand names/trademarks as the property of Pihsiang in whatever markets it believes this to be necessary and where a registration does not already exist". Thus the test of the obligation to procure registration was no more than if DMA believed it to be necessary in the context of the basic obligation to promote sales.
65. Clause 10 is the clause which gives rise to the most important issues of construction which fall for decision. I have already set out its wording in paragraph 2 of this judgment. I will here address it in more detail. It is of course important that Pihsiang had no reciprocal rights to require DMA to renew the Agreement if DMA chose not to do so itself.
66. The opening sentence, like Clause 3, contains a "best endeavours" clause obliging DMA to use such endeavours "to increase sales year on year". That is, as it seems to me, nonetheless an important and potentially challenging obligation viewed over time and one which, as a matter of construction, is I think free-standing and unaffected by the terms of the second sentence.
67. The second sentence provides that: "on the expiry of the first five year term of this agreement provided that DMA has discharged its obligations under the agreement and is maintaining a sales level of not less than 5000 units per annum, DMA shall have the right to renew the agreement for another five years on the same basis as herein" on payment of $100,000.
68. The first proviso requires DMA to have discharged its obligations under the agreement. I do not find it necessarily helpful, despite the agreed Issues, to enquire whether this looks to substantial discharge of individual obligations or discharge of only substantial obligations. If the court concluded that DMA was or had been in breach of one or more of the obligations in Clauses 3, 5, 8, 10 or 11 of the Agreement I think the question to be asked would be whether that failure or those failures amount in commercial terms to a failure by DMA to "discharge its obligations under the Agreement". That would not necessarily be so in my judgment in the case of a single even serious but quickly rectified breach nor in the case of a series of less serious breaches which were not treated as significant. The wording does not use the language of failure to discharge any obligation in the Agreement. It is, I think, more consonant with an assessment of the overall performance of DMA. That also has the merit of making commercial sense in an Agreement which indisputably was to be long-term. In colloquial terms it could be renewed provided DMA had done its job and in particular its job of promoting and selling only Shoprider scooters to the best of its ability.
69. The second proviso requires DMA to maintain a sales level of not less than 5000 units a year. It is an incremental requirement of the first proviso but in the events which happened, and indeed as perceived by DMA at the time, as a minimum target it was not onerous. Nonetheless, in a market which was highly competitive at the time of the Agreement, it was not wholly risk-free.
70. The third and last sentence of Clause 10 reads: "This right of renewal shall extend to all subsequent five year periods on the same basis for as long as permitted by law".
71. Unsurprisingly Pihsiang described this clause as in effect giving DMA the right to exclusive supplies of Pihsiang scooters in Europe in perpetuity. Indeed DMA's claim for damages is founded on 3 renewals but only because beyond such a period it is suggested the uncertainties and need to discount any returns render further claims unreal. The only expressed limitations on DMA's right to renew every 5 years are, first, the requirement that DMA has discharged its obligations and sold 5000 units and, second, that the right should endure only "for as long as permitted by law".
72. The second of these limitations was the subject of some considerable submissions. Before turning to those, I think it important to note that it is the extension of the "right of renewal" to any second and subsequent five year renewal which is the subject of these words. They do not qualify the first renewal but only those "subsequent" to it. The words would, therefore, as a matter of language, fall to be applied after 10 years and as each 5 year term thereafter expired, in the event on 6 February in the years 2006, 2011 and so on. The assumption is that the first 5-year term and the first 5-year renewal are unqualified. In the event both parties accepted as a matter of construction that this was so. What, then, is the effect of the final sentence and in particular the last seven words "for as long as permitted by law"?
73. Mr Mill submitted that the seven words cannot be relied upon to save an agreement which is otherwise void at the time it is made either at common law or under Article 81. The courts will not make an agreement for the parties or, in effect, advise them to what extent it is sustainable in law and then sustain it to that extent. On the other hand, as will appear, both Community and UK Competition law are developing, and the former at least recognises that the validity of agreements may be both restored and removed during the currency of their terms. Whilst it might be said to be doing no more than state what did not need to be stated, a provision recognising that a future right of renewal may have been outlawed by laws enacted or events occurring after the conclusion of an agreement would not only be otiose but silly. A change in the law or the facts making an agreement unlawful could and then would be operative at any time during any part of its term not just at renewal.
74. Mr Green QC submitted that the words did have a certain and legitimate meaning, namely to provide for a term certain of five (or ten) years and then for an option to enter into a new five-year agreement with the legal validity of the right to renew at each renewal point starting in 2011 being open to challenge by Pihsiang at that time. I cannot accept that. Such an agreement would equally fall foul of Mr Mill's submission, would make no sense as Pihsiang could challenge its legal validity at any time, and in any event I think it plain that the words provide for the "renewal" of the original Agreement not for a new contract on the same terms to come into existence. The claim in this case is indeed for damages for breach of the (1996) Agreement.
75. In my judgment the starting point for addressing the provision is to analyse the basis on which Mr Mill submits the words as written are ineffective. The importance to the outcome is that granted the seven words "for as long as permitted by law" are ineffective and I reject as I do Mr Green's construction there are, as Mr Mill submitted, two possible outcomes:

i) That the whole of the last sentence of Clause 10 has to be treated as ineffective, with the consequence that the court is addressing the issues on the basis that the Agreement is, subject to fulfilment of the other provisions of the Clause, to be considered a 10 year Agreement only;

ii) That only the offending seven words are to be ignored with the consequence that, again subject to fulfilment of the other provisions, it is renewable every 5 years for the rest of time.

76. I should record that both parties supported the second of these alternatives, indeed Mr Auld QC came close to submitting that the first alternative was an unsustainable judicially-inspired shortcut particularly because there was considerable evidence that DMA at least had intended the Agreement to be very long-term and because the seven words had been added later. But that, I think, oversteps the proper bounds of evidence admissible on questions of construction and of course ignores the (equally inadmissible) evidence of Mr Wu. No doubt the united stand reflected the parties' views as to the strength of their cases on the other issues. Nonetheless I think the question is a serious one which must be addressed. Duly chastised by Mr Auld and because I think a number of the issues raised are both difficult and of some importance whatever my conclusion I will not shrink from addressing them.
77. The leading authority, to which Mr Mill referred me, is the Court of Appeal decision in Davies v Davies (1887) 36 Ch D 359. A retiring partner covenanted (so far as material) "to retire from the partnership; and, so far as the law allows, from the business …." The Court held that these words were too vague for the court to enforce. One member of the Court (Cotton LJ) also held the covenant void on the ground that it was in unlawful restraint of trade because it prevented the retiring partner during his life from earning his livelihood by carrying on his trade (at page 386).
78. Cotton LJ, at pages 387-8 said:

"If parties wish to ask the Court to assist them in restraining those with whom they are dealing from breaking a limited covenant against carrying on a trade they must, in my opinion, themselves fix the limits within which there is no carrying on of the trade, and then they do it at their peril… There is no definite fixed rule as to the limits within which trade can be restrained. That must depend upon the circumstances of each case; and in my opinion it is wrong to make a covenant in this form, and wrong for the Court to enforce it … there are no limits fixed by law which can be regarded as introduced into this covenant. A covenant in this form, indefinite as it is in my opinion, is one which neither a Court of Equity nor a Court of Law ought to enforce. The parties must make up their minds to say what they agree to as regards the limits of time or space within which there is to be no trading."

79. Bowen LJ at page 392 said:

"…. If it (the covenant) only means that the covenant in restraint of trade is not to be unlimited, but that the limit is to be found by an appeal to the law, then it seems to me that the obvious answer is that that covenant is too vague for us to deal with. I think myself it would have been too vague even if it had remained in the nature of an executory contract to execute a deed in that shape. The parties would still be asking the law to do for them what they had not made up their minds about themselves. In fact they would be asking the law to make a contract instead of making a contract themselves. But on any view it seems to me that this is too vague. It is said that … we are to ask the law what is to be the restraint imposed upon the generality of the covenant. The law is absolutely incapable of answering a question so put."

80. Fry LJ at pages 395-6 said:

"I think the object of the contracting parties was to leave the law to make the contract between them. I think that it is the function of the Courts of Law to interpret contracts; to say whether a contract is or is not reasonable, to say whether a contract is or is not void, but it is not the duty of the Courts to make contracts between parties … So, again, if a limit of time be necessary in order to make the contract reasonable, the Court cannot lay down what length of time is requisite. When the parties to the contract have settled all those matters between themselves, then the court can attend to the suggestions of those who say that looking at all the particulars of the contract the contract is or is not unreasonable. I repeat that the substance of the document seems to me to throw upon the Court the making of the contract between parties. For that reason I think it is too vague to be enforced".

81. I therefore agree with Mr Mill's submission that the reason why the seven words are impermissible is that they are "hopelessly vague and meaningless". I also accept, as he submits, that the consequence is not that the Agreement as a whole falls away as too vague. The consequence is one of the two alternatives I have, as Mr Mill did, set out. But which?
82. As I have said the seven words expressly qualify the subsequent right of renewal. I do not think the unacceptable uncertainty of the seven words can be viewed in isolation from the right they purport to qualify. It is that right which is said to exist "for as long as permitted by law" and if, as I think, the law will not give effect to the qualification it should also not give effect to the right. Otherwise the court would be creating an unqualified agreement where plainly a qualified one was intended. It follows that in my judgment Clause 10 has to be read as providing for one five year renewal and no more. DMA's claim cannot therefore extend beyond one renewal and so beyond 5 February 2006 and the validity issues are to be approached on that basis. Nonetheless I repeat because the question is not an easy one and is not the primary case of either party, I will address the remaining issues both on this basis and on the basis that the right of renewal continued unqualified for potentially the rest of time.
THE FACTS

1996

83. DMA's Board Minutes show increasing sales particularly in the UK. They also show concerns expressed about sales in the rest of Europe and the need to dedicate greater resources to achieve more market penetration. Various proposals to meet this challenge were considered and progressed, including the acquisition of a Dutch company MRT or a German company to act as a distribution centre.
84. By 23 July 1996 DMA (by Mr Crowe and Mr Dalton) had signed an outline conditional agreement for the investment in Merits. The purchase of a 45% shareholding was completed in November.

1997

85. Mr Wu wrote a letter of complaint to Mr Dalton on 30 January. The complaints included "total numbers been sold is less than what we agreed upon" and lack of forecasts "for the next few months". Mr Dalton replied at length the same day expressing surprise at the complaints.
86. The Board Minutes again record the need to do better in Europe. Mr Dalton appointed Simon Dalton export sales manager to assist in addressing sales in Europe. MRT was found to be in severe financial difficulties so depriving DMA not only of a sub-distributor but also of a possible base for sales in mainland Europe.
87. It was in 1997 that Pride, the market leader in the USA, entered the UK scooter market and initiated a price war.

Powerchairs.

88. At a Board Meeting of DCC Healthcare on 26 June 1997 the minutes record that Pihsiang was "currently developing a new sophisticated powered wheelchair product and we should seek to obtain distribution rights for this product." At a Board meeting of DMA on 16 July it was noted that Mr Wu had indicated that he would "require a substantial agency fee again for the rights to distribute" the new power chairs in Europe. It was in July that DMA placed the first orders for the power chairs. The evidence is that the orders were thereafter dealt with in the same way as scooter orders but without the question of any specific agreement being further addressed. Mr Crowe noted in a report for August and again at a DMA Board Meeting on 31 October that DMA did not yet have exclusive rights to Pihsiang's power chairs.
89. In December a new DCC subsidiary DCC Shoprider Inc was appointed Pihsiang's distributor for Shoprider in the USA. That was a reflection no doubt of Mr Wu's strongly expressed satisfaction at the year end with DMA's performance in the year. Mr Dalton's response referred to keen competition from Pride, Sunrise, Booster and the Mayfair Freerider with prices dropping.

1998

90. Board Meetings of DCC Healthcare and DMA in April noted that one (of four) matters which should be given immediate priority was the development of a European distribution business. It was also noted that good growth had been achieved in Holland through sales to Practicomfort. At a July meeting Mr Dalton noted agreement that the most desirable solution to the "European issue" was to make a suitable acquisition preferably in Holland or Germany. Until then, Mr Dalton said, DMA would continue to support existing customers and to attend the major European trade shows.
91. Mr Dalton also wrote to Mr Wu on 4 July concerned about losing sales in the UK to Pride because of cost cutting and recording the high levels of stock DMA was holding as a consequence. He wrote again on 11 August and 2 September on the same theme saying even a 50% discount offered by DMA would be matched by Pride and seeking a rebate from Pihsiang on existing stock to help to achieve stock reduction.
92. Mr Wu was expressing concern about Merits. Merits had been in the scooter market particularly in America for some time by now. On 15 October Mr Crowe wrote to Mr Wu stating that DMA's only involvement with Merits was in "traditional products" and not in scooters or powerchairs where Mr Crowe stressed Merits treated DMA as a competitor. There is no doubt from his reply that Mr Wu found this hard to believe. On the evidence before the court, however, it was true. Mr Wu threatened to increase what he called "OEM sales activities" in America by which he meant supplying scooters to third parties who could brand them with their own brands. "OEM" is short for Original Equipment Manufacture.
93. The DCC Healthcare Board Meeting on 30 October noted disappointing sales and margins in the UK because of "non competitive prices" from Pihsiang and increasing competition. The minutes noted, however, that Pihsiang had agreed to a price reduction for the next season and that this together with changes to the management team should create scope for increased sales.

1999

94. On 7 January DMA placed orders up to and including shipments on 6 March. On 2 February Mr Wu wrote to Mr Dalton, copied to Mr Crowe, expressing Pihsiang's concern about "Shoprider Europe sales volumes". Mr Wu asked for information about "competitions marketing activities, sales volume, prices and promotions that you have". Mr Dalton replied by fax on the same day, assuring Mr Wu of a big increase in sales in the UK and Europe referring to a new Marketing Manager and a new catalogue costing £250,000. On 3 February Mr Dalton sent Mr Wu a list of European countries in which approvals for Shoprider had been obtained or were being sought. Mr Wu complained again to Mr Crowe on the telephone. This drew a further response from Mr Dalton to Mr Wu on 3 February refuting Mr Wu's complaints.
95. Pihsiang complained again on 1 March. Mr Dalton responded by sending a copy of the new catalogue, referring to the fierce competition and the fact that DMA had 1000 scooters in stock and more on the way. During the month Mr Dalton repeated that DMA had lowered its margins in an attempt to meet the competition.
96. On 23 March Mr Wu wrote to Mr Dalton seeking information on sales and prices and competitors in the UK and Europe. He also sought fax numbers for all dealers in Europe (excluding the UK) as it was said they were to be sent a questionnaire about their views of Shoprider.
97. In a long letter to Mr Wu dated 24 March Mr Dalton summarised the position referring to DMA's search for suitable European acquisitions; the "decimation" of the market by price reductions "caused by too many manufacturers targeting the UK and Europe" and the "relatively undeveloped" market in Europe. He gave Mr Wu the figures for sales by DMA in 1998 in the UK (5164) and Europe (1797) saying "you can judge for yourself our market share". The letter said Simon Dalton would respond separately with a list of Shoprider clients in Europe "but I don't really see that this would be helpful". The evidence is that Simon Dalton did not do so and that Mr Wu never repeated his request.
98. Mr Wu's response on 6 April was simply to repeat that Pihsiang was not satisfied with the volume of sales. Mr Dalton expressed surprise and disappointment. He said sales in March (750) were up on the previous year (606) referred to an order for 1500 scooters placed the previous week and promotions by discounting which DMA had made.
99. On 12^th April Mr Wu wrote in terms which I think may well betray his real complaint. He referred to Merits and DCC's 45% shareholding. He accused DMA and DCC of withholding "vital information from Pihsiang prior to signing the February 6^th agreement" namely that Merits was going to manufacture and market similar products to those made by Pihsiang. He also said that Merits had "gained product knowledge through our agreement". He said Pihsiang had therefore "no choice but to terminate" the Agreement.
100. This letter is revealing for two reasons. It makes no reference to any other circumstances affecting the Agreement when it was made and it does not suggest that any deficiencies in sales in Europe or want of information on sub-distributors could justify termination.
101. Mr Dalton replied on 12^th April refuting Mr Wu's allegations. He said that Merits made no competing products when the 45% interest was acquired. It had gained no knowledge. The purchase was made to protect DMA's supplies of other products and the Agreement with Pihsiang had been honoured at all times. He added that "just how you can even consider selling to DMA on a non-exclusive basis is really surprising" because it made no sense to go back to Shoprider competing with Shoprider. Mr Crowe (with a PS from Mr Flavin) also responded on 13 April in similar terms.
102. At this time the acquisition of Casa Garden in Germany by DCC was progressing. It was completed on 25 May and Mr Crowe wrote to Mr Wu about it the next day referring to the acquisition as another step in building Shoprider in Europe and saying (truthfully) that Casa Garden had been selling a competing scooter range (supplied by Merits) but it had been switched over to Shoprider. Following the acquisition DCC changed the name of Casa Garden to Casacare. Mr Wu did not relent. His target was Merits and Mr Cheng. He also referred to lower sales volumes by DMA. That was simply belied by the facts as Mr Dalton pointed out to him. Sales in the USA were disappointing. Mr Crowe attributed that (at least in part) to the adverse impact of OEM or "own label" selling by Pihsiang and told Mr Wu as much.
103. In November DMA prepared a "strategy" document for the three years ending 31^st March 2003. The figures, prepared at a time when there was no suggestion of litigation, show forecasts of increasing sales (by about 15% a year) of the Shoprider range and maintaining a gross margin of just over 25% across the whole range of DMA's sales (of which Shoprider represented a little under 50%).

2000

104. The irony of events in 2000 is that DCC's relationship with both Pihsiang (in the USA) and Merits led to litigation; litigation which came to be resolved eventually by Pihsiang acquiring DCC Shoprider Inc in October 2001 and Merits' other shareholders buying out DCC's 45% interest in 2003.
105. On 3^rd April Mr Dalton wrote to Mr Wu recording that UK scooter sales had risen by 27% and European sales by 43% in the year to 31 March 2000, with sales of almost 10,000 units, adding "it just goes to prove that having an exclusive distributor is best for your business".
106. As the year approached its end the question of renewal of the agreement understandably arose. A letter dated 29 November records that Mr Dalton and Mr Wu had discussed the matter and Mr Dalton was going to pass on Mr Wu's comments to Mr Crowe.
107. Mr Wu gave evidence that it was in this conversation with Mr Dalton that he had told Mr Dalton the Agreement was no longer in force and would not be renewed. I am sure he did not do so. Mr Dalton's witness statements make no reference to any such conversation. Mr Crowe said Mr Dalton had spoken to him following his conversation with Mr Wu saying that Mr Wu had said he did not want the renewal money and Mr Wu was being his usual slippery self in order to try to gain some commercial advantage. Had a conversation occurred in the terms of Mr Wu's evidence it would have been pleaded in paragraphs 30 and 31 of the Amended Defence and Counterclaim and it would have appeared in Mr Wu's witness statements. Subsequent events are wholly inconsistent with it albeit it was in November that, in breach of the Agreement, Pihsiang supplied Practicomfort direct with some scooters using a nameplate Taiwanese company to do so. Mr Wu admitted this supply in his witness statement dated 3 September 2003 in the face of documented proof having denied it unequivocally in his first statement dated 20 March 2003. Practicomfort was, as Mr de Groot made more than clear, upset by the purchase of Casacare by DCC. Practicomfort's business included sales of Shoprider in Germany from its base in the Netherlands and Casacare was taking some of that business. Practicomfort was also indebted to DMA at this time in a sum of about $300,000.
108. Also in November DMA prepared a further "strategy" document for the 3 years ending 31 March 2004. The strategy included development of export markets through Casacare and a search for acquisitions in "Holland/France/Spain". The documents recognised the difficulty of selling in other European countries without a direct presence. The projected sales figures for scooters and power chairs were higher than shown in the equivalent 1999 strategy document (paragraph 103). They also showed a compound growth rate of 14/15% from a higher base. The projected gross margins at 29.2, 29.6 and 30.2% were also higher.
109. In December Simon Dalton resigned from DMA giving 1 month's notice. On 28 December, without prior warning, John Pitt and Harman Roberts resigned, and John Dalton's resignation took effect.

2001

RENEWAL

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

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

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

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

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

111. This letter was thoroughly disingenuous. I have no doubt at all that Mr Wu was well aware of the resignations and retirements at DMA. Increases in sales of 50,000 units would, as Mr Crowe said, have equalled the entire European market. In reality the letter was another attempt by Mr Wu to get out of or to vary the Agreement.
112. The next day Mr Wu spoke to Mr Teeters (who had recently visited Taiwan) on the telephone. Mr Teeters reported by Email to Mr Crowe on the conversation. Mr Teeters said, and his Email supports him, that Mr Wu did know about the management changes at DMA but was complaining about the lack of communication from DMA about them. Mr Wu had also told Mr Teeters that he had been consulting attorneys about the Agreement and believed he had a "defensible case in going to Europe direct if no partnership were reached" the case being built on non-performance in various European markets and the holding in Merits.
113. Mr Crowe was alive to Mr Wu's manoeuvres. He arranged to accompany the new DMA team and Mr Teeters to Taiwan on 6 February (the renewal date) to make a presentation to Pihsiang over two days. He spoke to Mr Wu about this and wrote to him on 15 January. The items to be covered included the sales and marketing for Europe for 2001/2002 and the possible sale by DCC of its interest in Merits or the purchase by Pihsiang and DCC of all of Merits. Mr Crowe also asked for a copy of the full prospectus for Pihsiang's planned flotation. Mr Wu accepted the plain fact that this letter was written on the basis that Mr Crowe was thinking the Agreement would continue but Mr Wu said he did not treat it seriously.
114. On the same day Mr O'Neill, newly appointed Managing Director of DMA, also wrote to Mr Wu. The letter included reference to the recruitment of Mr Hermolle and his very considerable experience in the industry and a 2001 forecast of sales of 14000 units.
115. On 19 January Mr Crowe wrote again to Mr Wu about the two purposes of the meeting in Taiwan: first to introduce the new team and present DMA's sales and marketing plans for the coming year and second to learn of Pihsiang's development plans and pricing. Mr Crowe said: "it is important for you to appreciate that, at this time of change in DMA as we move forward from a family managed business we have taken the opportunity to put a stronger team in place in Europe and to increase the level of professional marketing activity".
116. Mr Mill submitted that this letter and Mr Crowe's letter of 4 January were a recognition that DMA's performance to date had not been adequate. I do not agree. It was an assurance to Pihsiang that DMA would continue to perform despite the departures of those in whom Pihsiang had apparently had confidence before.

Pihsiang's 30 January Board Meeting

117. Pihsiang held a Board Meeting on 30 January. Mr and Mrs Wu were both present. The meeting approved the procedures for the public listing of Pihsiang's shares. Mr Wu was authorised to work with shareholders on the number of shares to be underwritten. The minutes, under the heading "other operational concerns" record that Pihsiang was to assess the feasibility of setting up a subsidiary or branch in the US and to assess the sales potential in mainland China. The minutes make no mention of the DMA Agreement.
118. However both Mr and Mrs Wu say that at the meeting it was made clear that the Agreement would not be renewed. Their evidence is supported by the evidence of Su-Chin Yang and Yu-Wen Wu: see paragraph 16(v). Indeed the latter produced a report made by him to his superiors of the meeting which records that "because the European distributor DMA failed to perform its obligation according to the agreement and the result of its operation in the market failed to meet the expectation Pihsiang will not renew the agreement after the agreement expires". The report, like the witness statements, was, however, only provided in early September 2003.
119. Notwithstanding this report I have serious doubts about this evidence. I cannot understand how the minutes could omit such an important item whilst recording other matters of less immediate significance. Various explanations were offered: Mr Wu said the minutes only recorded what was required for Government purposes and that they only dealt with Agenda items. But there is no evidence of any relevant Government requirement; some of the recorded items hardly seem to have any relevance to any Government, and are of much less importance than termination of the DMA Agreement; the Agenda has not been disclosed (it is said Pihsiang do not retain Agendas once the minutes have been prepared) and Yu-Wen Wu's note does not follow the numbering of the minute; and if the Agreement were to end that would have to be recorded in the Prospectus. Yu-Wen Wu himself, when giving his evidence, thought he had retained a copy of the Agenda but subsequently it was said that he had not. Moreover, as will be seen, subsequent events and in particular the facts that it is no longer even suggested that DMA was informed of this decision and that the March Prospectus referred to the Agreement in terms of its continued existence, are not consistent with this account.

Payment of the $100,000.

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

"Dear Donald,

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

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

122. The attached bank transfer was dated 2 February and did show the transfer of $100,000 from DMA to Pihsiang's account at First Commercial Bank Hsinchu Branch.
123. Granted, as I find, that the fax was received by Pihsiang and Mr Wu it is concerning that Mrs Wu said she knew nothing about it. Finance was her area. The renewal of the Agreement would be a matter they would be bound to have discussed and to discuss as indeed she says they did. The evidence of Mr and Mrs Wu about this payment is wholly unsatisfactory. In his first statement (20 March 2003) Mr Wu at least implied that because of the erroneous fax number Pihsiang had not received the fax dated 3 February. He stated that as soon as he had discovered the payment he had instructed his employees to return it and he confirmed that he had only been informed of the payment after the meeting on 7/8 February. Mrs Wu said nothing about the payment in her first statement (21 March 2003). In his statement dated 8 May 2003, following statements by Mr Crowe and Mr O'Neill, Mr Wu denied that there had been any discussion about the payment at the 7/8 February meeting but otherwise made no relevant change to his previous statement.
124. In Mrs Wu's statement dated 3 September she mentioned for the first time what was said to have occurred in relation to the Agreement at Pihsiang's 30 January Board Meeting and said that following that meeting and having been warned about the $100,000 by Mr Wu shortly after it, she "was aware that the agreement would not be renewed and we would have to reject this fee if it were paid". She said she asked the bank to notify her if it was paid and the bank did so on 5 February. She said she went to the bank the next day and completed an application to return the payment to DMA. There is in the papers an instruction dated 6 February bearing the signatures or seals of Pihsiang and Mr Wu stating that the remittance is "wrong" and asking that the amount be returned "directly". Mrs Wu said she affixed the seals to this instruction. Mrs Wu believed she had first mentioned the repayment to Mr Wu at lunch on 9 February "after the DMA representatives had left". Thus, if this was correct, contrary to his statement Mr Wu had given no instructions to the bank to return the payment and only learnt of it from Mrs Wu. Mr Wu's statement dated 3 September said he had not recalled Mrs Wu's role before "but having discussed it with her I believe this must have been what happened". He described his first statement as "incomplete": he was referring to a later repayment in August 2001 which he had instructed to be made. He said "what is clear in my own mind is that I did not know that the payment of $100,000 had been made and that this had already been returned when I met with DMA on 7 and 8 February 2001". The payment was returned by Pihsiang's bank on 7 February but only reached DMA's bank on 12 February.
125. Thus, if they were to be believed, neither Mr nor Mrs Wu ever saw the 3 February fax. Mrs Wu instructed the return of the money using Mr Wu's seal. Mr Wu was wholly ignorant of either the payment or its return until after the DMA representatives had left Taiwan. Granted, as I find, that Mr Wu did receive the 3 February fax he could hardly fail to have discussed it with Mrs Wu. Moreover I am sure Mr Wu did (see paragraphs 130-132) discuss the payment on 7 February with Mr Crowe and Mr O'Neill as they say he did. The changing accounts by Mr and Mrs Wu were all designed to distance Pihsiang from renewal of the Agreement of which the $100,000 payment was an obvious symbol and to enable Mr Wu to say that no reference to the payment had been made when DMA came to Taiwan. They were all false.

The DMA Presentation in Taiwan.

126. The DMA team duly arrived in Taiwan on 6 February and presentations were made over the next two days. The slides are available. Remarkably there is a stark conflict of evidence about the part played by Mr and Mrs Wu in the presentations. Mr Crowe, Mr O'Neill and Mr Teeters say the European presentation on the first day was a great success. Mr and Mrs Wu were present throughout along with (unusually) a number of Pihsiang staff. Mr Wu frequently stopped the presentation to translate what was being said. Mrs Wu took copious notes. The evidence of Mrs Wu (and Mr Wu) is that she was not present at all save for introductions as she had so much to do on the Prospectus. The evidence of Mr Wu is that he was constantly going off to do other things and was only present for a few minutes. Again, I have no doubt that Mr Crowe, Mr O'Neill and Mr Teeters were telling the truth about this and Mr and Mrs Wu were not. The importance of the meeting was that it is apparent from the presentation and context that DMA was acting on the basis that the Agreement had been renewed and those present must have appreciated as much. I have no doubt at all that (despite their evidence) Mr and Mrs Wu would not permit Pihsiang's staff to attend such a meeting alone even if they would have had a sufficient grasp of English to do so. Moreover the notion that such a team from DMA would travel to Taiwan and make a presentation in the absence of the Wus is fanciful. The documents, both before and after the meeting, are again eloquent testimony to where the truth lies. For example Mr Crowe's Memorandum to file on the visit dated 12 February records that Mr and Mrs Wu were present at the presentation on Europe.
127. One of the slides at the presentation gave an "overview" of the European market (including the UK) noting that the market was "fragmented" with significant cultural differences between north and south and differing social and regulatory considerations. The same slide said that Shoprider was the acknowledged market leader and continuing to gain market share. In Germany it was said that Shoprider's market share had increased from 2% to 22% over the last five years. DMA/Casacare was said to have a network of 80 dealers and a sales force of 12.
128. In preparation for the meeting Mr O'Neill had prepared a document which was intended to show DMA's investment in Shoprider over the first five years. It showed a total sum of £7.84m but that included the full cost of Casacare (£2.5m), which had other products, and some other items which could not be fully attributed to the Shoprider part of DMA's business alone. But I do not doubt that a substantial part of this sum was properly attributable to the Agreement and the exclusivity and so security to invest which it provided for DMA.
129. Mr O'Neill wrote to Mr Wu on 18 February dealing with a number of commercial points which had arisen in Taiwan. He enclosed a letter sent to dealers "which will launch our new team and service levels as indicated in our presentation to you". The enclosure said in terms in the first paragraph that at a recent visit to Pihsiang DMA had successfully renewed the exclusive agreement for a further five-year period. Mr Wu said he read this and was laughing and just passed it on to a sales girl.

The Return of the $100,000.

130. There is a further stark conflict of evidence about the $100,000 payment. Mr O'Neill and Mr Crowe say (and Mr Teeters corroborates) that in a private conversation before Mr Wu took them out to dinner at the end of the first day Mr Wu acknowledged receipt of the money but said he would like the payment to be made to a private account of his wife in America of which he would provide the details. The $1.08m had been paid to such an account in 1996. There is no doubt that, in his own writing, Mr Wu later sent Mr O'Neill by fax details of such an account. Mr O'Neill said and I accept that this followed a telephone conversation on 14^th February in which Mr Wu had asked for Mr O'Neill's home fax number so that he could send the details of Mrs Wu's account. On 27 February Mr O'Neill sent a fax to Mr Wu (copied to Mr Crowe) marked "Strictly Private and Confidential" saying he had received "details re the first five year renewal of our European Shoprider agency agreement" setting out the details of Mrs Wu's account as supplied by Mr Wu. The letter concluded by saying that DMA needed a signed written instruction on Pihsiang letter paper before DMA could "finalise this". It is both Mr O'Neill and Mr Crowe's evidence that Mr O'Neill had also made this clear in Taiwan when the matter arose. That instruction was never received. Between June and October the $100,000 went to and fro on a number of occasions.
131. Mr Wu's evidence is that the only discussion about money in Taiwan related to Mr Crowe and Mr O'Neill's personal interest in buying shares in Pihsiang from the Wus and that was why he had provided details of Mrs Wu's account. He said they had raised the question with him whilst in Taiwan whether they could personally buy shares in Pihsiang prior to the flotation.
132. Both Mr Crowe and Mr O'Neill found it hard to hide their feelings about what Mr Crowe said was the enormity of this lie. I am not surprised at their reaction. It was a lie and a scurrilous lie too. It was told in the teeth of the documents. It was told because Mr and Mrs Wu both recognised that payment of the money and of course its receipt by Pihsiang could only be consistent with renewal of the Agreement.

PIHSIANG'S MARCH PROSPECTUS.

133. Pihsiang's Prospectus for the public listing of its shares was published on 16 March. The flotation itself took place on 21 March. In the context of the issues in this case it is a remarkable document. The responsibilities and sanctions in relation to such Prospectuses in Taiwan would readily be recognised both in this country and the USA. The sanctions for a Prospectus containing false information are both civil and criminal. They are also reflected in the terms of the Prospectus itself.
134. The Prospectus stated at the beginning that "Issuers shall be jointly and severally liable with the (auditors) if there is any misrepresentation or false statement in the financial reports…. The issuer (Pihsiang), the responsible persons of the issuer (Mr and Mrs Wu) and the signatories of this Prospectus (also including Mr and Mrs Wu) will be responsible for the misrepresentation or omission, if any, contained in this Prospectus". The underwriters of the issue were Ta Hwa (Grand Cathay Securities Corp.). Ta Hwa prepared and included in the Prospectus an "Evaluation Report" dated 15 June 2000. The report states, as would be expected, that they had met with management from time to time to gain an understanding of the "business operation, future competition, prospective development and future development plans of the company". The report referred to some of Dr Harrop's work. It referred to rapid growth of sales in Europe of 30% over the last 3 years. The report explained the appointment of DMA on the basis that due to language and cultural differences it had not been easy for the company "to administer the distribution access".
135. The body of the prospectus included a number of significant statements:

i) The demand for scooters and power chairs will continue with stable growth;

ii) Due to competition for a manufacturer to survive in the market it must be able to reduce production costs and upgrade quality;

iii) DMA was the major customer of Pihsiang in the years 1997 to 1999 with increasing sales but a declining percentage of the total sales worldwide by Pihsiang;

iv) The Agreement was referred to as a major contract and stated to be for the "exclusive agency in Europe with a term of 6 February 1997 to 6 February 2002";

v) The relationship with DMA was referred to in Section R of "Special Disclosures". It was there stated that:

"The greatest demand of the market for medical scooters falls in Europe, which covers 60% of the world demand. Thus the Company was focused in Europe from the very beginning …. Due to the fact that Europe is a multi-linguistic and multi-cultural region, Pihsiang's main marketing strategy has long been searching a qualified distributor to be responsible for the promotion of products, preparation of brochures and provision of post-sales services. This is also the main reason why the Company could successfully gain access to the market. Early times, Pihsiang had located several different distributors in Europe and in USA but due to the inconsistency of marketing strategies and the mutual competition, the end result is not beneficial to the opening of distribution channels. Pihsiang therefore withdrew all the authorization in 1997 and exclusive designated the best performer, DMA, as its exclusive distributor in Europe. Judging from averaged growth rate of 15% in Europe for the past three years, it is obvious this marketing strategy works."

vi) Section R also stated that "within the distributorship agreements, the minimum sales quantity is guaranteed and failure of which could lead to Pihsiang's termination of the distributorship agreements. As Pihsiang's products are world number one and highly recognised by the users; also in the past eight … years DMA … gained long-term and steadily growth profits, thus their relationship with Pihsiang will not easily come to an end".

136. Mr and Mrs Wu sought to distance themselves totally from any involvement in the Prospectus. Mr Wu said he understood it had to be the independent work of Ta Hwa, it was handled by his wife and he was not involved with or consulted about it. He had not read it or sought to understand it but just signed it. Mrs Wu said it was all a matter for Ta Hwa and management was not allowed to influence them. They had not spoken to her. That evidence is belied by the responsibility statements and Ta Hwa's Evaluation Report. It also defies commonsense. I reject it. Remarkably it is said by Mr Wu that Pihsiang has not kept any documents relating to the preparation and submission of the Prospectus other than the minimal disclosure in fact made. No one who was involved in the Prospectus, on Pihsiang's case, gave evidence.
137. It does appear that much of the substance of the Prospectus and the matters to which I have referred were prepared in about April 2000 and undoubtedly the English version of the Prospectus gave the wrong dates for the (first) term of the Agreement. That mistake was repeated in two subsequent Prospectuses dated 7 September 2001 and 18 February 2002. Mr Wu suggested the error in the dates may have arisen from a translation failure of the dates of the different calendars and he may well be right about that. But, on any view, the terms of the March Prospectus represented the views of Pihsiang and, as I find, Mr Wu about the purpose and operation of the Agreement in origin and as at April 2000 and undoubtedly those views should have been corrected if they had changed by the date of publication.

SUBSEQUENT EVENTS.

138. There is no doubt that DMA conducted its business in the early months of 2001 on the basis that the Agreement was in force. Pihsiang did not. Nor had it done so since November 2000. As the year progressed DMA noted the disappointing level of scooter sales and the consequent high level of stocks. There is documentary evidence that by early July John Dalton was assisting RMA in its business. Indeed he also visited Taiwan with his son Simon in early July. Simon Dalton said that on the visit he did but his father did not visit Pihsiang and Mr Wu.
139. On 11 July Pihsiang, in a letter signed by Ginny Lin, wrote to Mr O'Neill. There can be no reasonable doubt that Mr Wu was the authority behind if not the author of the letter. The letter complained that the number of sales had not increased impressively and it complained that competitors were succeeding in entering the market. The final paragraph read:

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

140. This letter also was wholly disingenuous. Pihsiang was already selling to others in Europe and Mr Wu had recently told Simon Dalton he would sell direct to RMA, albeit disguising the sales by use of a nameplate company. The letter does however appear to recognise that but for the complaints Pihsiang could not act as it was threatening to act. Notwithstanding the threats Pihsiang continued to seek orders and forecasts from DMA.
141. DMA was receiving an increasing amount of information about Pihsiang's activities. At a meeting in Taiwan on 8 June Mr O'Neill raised with Mr Wu sales by Pihsiang to Practicomfort and Mr Wu said it must be his Japanese customer who had made the supplies and he would investigate the matter. That was another lie. The inference on the evidence is that Mr Wu wanted to obtain as many orders as he could from DMA before switching to RMA once RMA had been able to establish a sales network. Deliveries to RMA appear to have started in August. Mr O'Neill raised the issue of breaches by Pihsiang of the Agreement with Mr Wu again at a meeting on 27 August at the Taipei office of Baker & McKenzie attended by Henry Chang. Their account of this meeting is plainly accurate and truthful, in particular Mr Wu said nothing about the Agreement being at an end or DMA being in breach of it but conducted the meeting on the basis (or apparently on the basis) that the Agreement had been renewed.
142. Pihsiang made a public share issue in September publishing a Prospectus on 7 September. Remarkably the DMA agreement was again listed as an important contract "in good validity … to expire within the proximate year" having a term of 6 February 1997 to 6 February 2002. Mr and Mrs Wu were also the "responsible persons" for this Prospectus.
143. On 11 September DMA's solicitors wrote to Pihsiang for Mr Wu's attention. The letter asserted breach of the Agreement by sales to RMA. RMA was written to in similar terms. The letters sought undertakings to abide by the Agreement. Mr Wu chose to write to Mr Crowe on 17 September. The letter if not a response was plainly a reaction to the letter from solicitors. It is revealing. It referred to tremendous pressure from Pihsiang's board and shareholders which Mr Wu acknowledged, when giving evidence, was something he had made up. Indeed remarkably he described most of the letter in those terms, despite stating to the contrary in paragraph 20.5 of his witness statement dated 8 May 2003. The letter asserted that during the past 5 years and at the time "Shoprider has been losing both the market share and the reputation. After analysing thoroughly the board pointed out that DMA obviously failed to fulfil the existing (my emphasis) agreement terms as well as failed to make every effort to keep the European market share". In fact the evidence is plain that during the 5 years Shoprider's market share increased. The Merits conflict was again referred to. The letter is a statement of complaints about performance of an existing Agreement and nowhere even suggests there is no Agreement. Mr Wu's attempts to explain this in cross-examination were unintelligible. Of course if it had been represented to Mr Wu that the Agreement would terminate if John Dalton ceased to be Managing Director of DMA Mr Wu could and I am sure would have said so at once. In fact not only was it not referred to but other matters were.
144. DMA's solicitors replied to Mr Wu on 19 October. The letter referred to further breaches of the Agreement by Pihsiang including sales via another company in Taiwan and sales at lower prices than those charged to DMA contrary to Clause 6 of the Agreement. This letter produced a response from Mr Wu dated 3 November in which he did assert that "no … agreement exists" and that he was "fed up with letters from solicitors about an agreement that has come to an end". On 26 November Mr Wu wrote to DMA again rejecting payment of the $100,000 and stating that "you know as well as I do that the previous contractual arrangements came to an end in February of this year".

2002

145. The exchange of correspondence ended with DMA's solicitors' letter dated 26 April in which DMA recognised the inevitable and "reluctantly" accepted that Pihsiang had no intention of abiding by the Agreement and that Pihsiang had repudiated it. By that time a claim had already been issued in which DMA had sought to enforce the Agreement. In early 2002 Pihsiang ceased supplying DMA altogether. Pihsiang also reduced the prices of scooters supplied to RMA and Practicomfort.
146. Perhaps the final irony came in April when RMA wrote to Mr Wu telling him of the extensive competition RMA was facing, how they needed a price advantage from him together with their own low gross profit margins to match and beat the competition, and how their organisation was already in place proved by the sale of 865 units in March alone despite DMA selling off its stocks at low prices. In a Questionnaire sent to Mr Wu on 3 April RMA spelt out the advantages of Pihsiang agreeing to an exclusive arrangement with RMA in almost the same terms as Mr Dalton had done for DMA in 1995: "confusion, especially with having several suppliers of the same products has caused problems in the past and we cannot go down that route again. As we have said many times, our emphasis should be on competing with and knocking out other manufacturers from this market and not compete Shoprider against Shoprider".

2003.

MITIGATION

147. DMA currently acts as distributor of scooters manufactured by Merits in the UK and recently commenced as a distributor for Kymco (Kwang Yang Motor Co Ltd) across Europe. Kymco is also a Taiwanese company. Casacare acts as a distributor of Pride scooters in Germany. This is the background to the issues which arise both as regards mitigation of the loss for which DMA claims and the costs it contends it has incurred or will incur in seeking to mitigate that loss.
148. As regards Merits the "costs of mitigation" were addressed by Mr O'Neill in his third witness statement and by Mr Ellison in Ellison 1(Section 14.4). The total is £591,000. Essentially the costs were incurred in the promotion and training required to enable DMA to market a new product in competition with Shoprider. Merits was seen as a short-term solution to replace Shoprider. Pihsiang accepts only a sum of £59,580 about which Mr O'Neill gave evidence but disputes the balance on the basis that DMA has not proved it. However DMA has disclosed some supporting documentary material and invited Mr Bolton to attend at Bridgend to inspect relevant records. In those circumstances, I see no reason to doubt the figures presented by DMA. Of the sum of £591,000, some £387,000 has already been spent and the balance will be spent by the end of 2004.
149. In relation to Kymco the "cost of mitigation" is claimed to be £600,000. On the day of closing speeches, DMA produced further documentation in support of this aspect of the claim showing expenditure of £703,000. $622,000 of that amount represents payments made ($266,000) and to be made to Kymco under a "product contract" dated 18 September 2003. The product contract was signed together with a "Collaboration Agreement" between Kymco and DMA. Both agreements are commercially sensitive and I will refer to their terms only so far as I think necessary to address the issues to which they give rise. The Collaboration Agreement provides for exclusive distribution rights for DMA in both Europe and the USA. The term of this agreement is 5 years with yearly renewals subject to 90 day written notice of termination by either party. Whilst Kymco retains intellectual property rights in the products DMA has ownership of the tools used to manufacture the products it has designed and, following termination of the agreement, the right on payment of a royalty to use the tools to procure the products from another manufacturer.
150. The investment by DMA in the agreement with Kymco is, however, the price not just for European exclusivity for 5 years but also for such exclusivity in the USA. It also "bought" the tooling. It follows, I think, that it would not be right for the total investment cost to be added to DMA's claim. There is evidence that the European market was about 30% of the worldwide market but it was the European market which I think it is fair to infer explains DMA's main interest in making the investment. In those circumstances and doing the best I can I think DMA can claim for 50% of the costs for which they do claim (£600,000) rather than the full amount. That reduction is also intended to reflect the fact that on my findings DMA would probably have had to seek replacement supplies in 2006 in any event albeit not in the "crisis" situation which in fact occurred.
151. The reason offered in a note by counsel for DMA for Casacare distributing Pride scooters in Germany rather than Merits is said to be that Merits scooters were and are not approved by the German regulatory authorities. Whilst Pihsiang objected that it had no opportunity to test this assertion it was made in answer to an equally unheralded suggestion by Pihsiang that DMA had failed to mitigate its loss by not continuing to supply or supplying Merits scooter to Casacare. In those circumstances I am prepared to accept that there is nothing of substance in Pihsiang's submission, particularly so as Mr Ellison has included in DMA's claim only the 5% contribution from Casacare sales represented by DMA's sale price to Casacare and no claim for loss of the profits which Casacare itself might have achieved.

THE AMENDED DEFENCE.

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

THE HEARING.

153. Finally, as regards the trial itself, whilst the parties are to be congratulated for the economy with which the evidence and oral argument was addressed and completed, it should also be recorded that the court had received very substantial written opening submissions and, after the conclusion of the evidence, closing written submissions on behalf of DMA of 263 pages and on behalf of Pihsiang of 227 pages followed by written reply submissions from both parties totalling some further 125 pages. It was the need for the court to absorb these and the 11 ring binders of legal materials and authorities which were also placed before it that accounts in large part for the time gap between the conclusion of the evidence on 17 November and the closing oral submissions on 9 December.
ARTICLE 81
154. Pihsiang alleges that the Agreement infringes Article 81 of the EC Treaty. DMA contends, first, that the Agreement does not fall within Article 81(1) at all and would not have fallen within it even if the Agreement had persisted with successive renewals. Secondly DMA submits the Agreement would in any event have fallen within the block exemption Regulation 2790/1999 ("the Vertical Agreements Regulation") and would therefore have received automatic exemption under Article 81(3) from the application of Article 81(1) and 81(2). Thirdly, even if the Agreement be held to fall within Article 81(1) and not to benefit from exemption under the Vertical Agreements Regulation, DMA submits it would nevertheless have benefited from individual exemption under Article 81(3) either retrospectively (had exemption been sought from the Commission) or prospectively from the national court under Council Regulation (EC) No 1/2003 ("the Modernisation Regulation") as from May 2004 when that Regulation comes into force.
155. To put the evidence in the context of these submissions requires that I set out the relevant provisions of Article 81 and the Regulations along with certain other comments and explanations, before I summarise the expert evidence. It was to the issues which arise under Article 81 (and to an extent the common law) as well as quantum issues that the expert evidence was directed.
156. Article 81 (1) prohibits as incompatible with the common market:

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

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

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

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

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

157. Article 81 (2) provides,

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

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

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

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

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question."

159. Thus there are two positive and two negative conditions to be met.
160. It is Pihsiang's contention that the Agreement fell within Article 81(1) both as a matter of its "object" and its "effect". But Mr Beal, who dealt with this issue on behalf of Pihsiang, said the primary case was "object" not "effect". It is not suggested that there was any infringement of Article 82 (abuse of a dominant position).

Block Exemption: The Vertical Agreements Regulation:

161. Article 2 of the Regulation provides:

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

162. The Agreement is a vertical agreement within the meaning of this Article. Pihsiang was the manufacturer supplier and DMA was the distributor in Europe.
163. Article 1(c) of the Vertical Agreements Regulation defines "exclusive supply obligations" as:

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

164. By virtue of Clause 4 of the Agreement which obliges Pihsiang only to sell to DMA within the European Community, the Agreement between DMA and Pihsiang is an "exclusive supply agreement" within the terms of the Vertical Agreements Regulation.
165. Article 3.2 of the Vertical Agreements Regulation provides:

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

166. DMA contends that it did not have more than 30% of the "relevant market" namely DMA's share of the wholesale market on which it purchased products from Pihsiang.
167. It is of course necessary, in order to address this question, to define the relevant geographic market and the relevant product market.
168. There are other provisions of the Vertical Agreements Regulation which also require to be considered. Article 4 provides that the exemption in Article 2 shall not apply to vertical agreements which directly or indirectly have as their object certain "hard core" restrictions such as price control. Article 5(a) provides that:

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

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

Individual Exemption.

169. It is DMA's submission that, in any event, at any point in time at which the validity of the Agreement might have been challenged it could have been notified to the EC Commission and given exemption. As from May 2004 the Modernisation Regulation will enable the High Court itself in a proper case to grant individual exemptions. The Agreement was not notified at the time it was entered into but DMA submits that it did not have to be, citing Council Regulation (EC) 1216/99 amending Council Regulation No. 17, and submitting that individual exemptions can be granted retrospective to the date an agreement is concluded.
170. Individual exemption requires that the Agreement satisfy the four conditions for exemption contained in Article 81(3): paragraphs 158 and 159.
THE EXPERTS

(1) ECONOMISTS

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

i) Clause 3 of the Agreement, obliging DMA to source scooters only from Pihsiang, raised a potential concern that the market would be foreclosed to other manufacturers. The degree of concern would depend on the size of the tied market share and the term of the agreement.

ii) Clause 4 of the Agreement, obliging Pihsiang only to supply DMA, raised potential concerns that the market would be foreclosed to competing distributors and that intra-brand competition was eliminated. The degree of concern would again depend on the size of DMA's market share and the term of the agreement and the strength or otherwise of inter-brand competition.

iii) Clause 10 was of obvious importance in the light of Clauses 3 and 4: "to the extent that a distortionary effect exists, or could exist in the future, a long-lived contract would have the effect of allowing such a situation to persist indefinitely".

173. The key to evaluation whether or not a competitive distortion was likely to exist was to identify the relevant market and market shares concerned.
174. Product market. Mr Burns concluded, really relying on the reports of Dr Harrop and Mr Clay, that scooters and power chairs had "a clear difference of functionality", were used by different types of customers, and that the introduction of power chairs had had no demand effect on sales of scooters. He concluded that there was "no compelling evidence" that he should widen the market definition beyond scooters.
175. Geographic Market. Mr Burns, on the basis that average prices in Germany and the Netherlands moved closely together but independently in the UK, demand trends were steady in the UK and Europe, and market shares in the main brands, except Pride, differed substantially in the 3 countries, concluded that the UK market constituted a separate geographic market. But the basis of his approach was to examine the market and prices at the end user retail level. Moreover Mr Ridyard pointed out that Mr Burns' figures were in any event affected by short-term exchange rate fluctuations and, as average prices, ignored the different product mix in the countries.
176. Mr Burns' evidence about market share was derived simply by applying Mr Ellison's compounded annual growth rate (CAGR) for DMA of 14% against a total market growth of 7% estimated in a 1999 Frost & Sullivan Report and applying Dr Harrop and Mr Clay's market share figures as well as a hybrid. These arithmetical calculations showed DMA's UK market share exceeding 30% at the latest in 2005 and on two of the measures in 2002.
177. Mr Burns also concluded that the Agreement had an appreciable anti-competitive effect on the UK scooter market. But that was largely, if not entirely, the result of his conclusion that DMA's market share at the retail level would exceed 30%. He also said there was evidence that prices had been low before the Agreement, rose during it, but fell again after it was terminated which itself was evidence the Agreement had an anti-competitive effect. However such evidence as there is suggests that the decline in prices was steady and constant and that the lower prices after the Agreement terminated were caused by RMA entering the market and DMA selling off stocks: paragraphs 145 and 146.
178. Mr Burns examined competition concerns in three respects, namely whether the Agreement

i) Could lead to upstream manufacturers being foreclosed from the market;

ii) Could lead to downstream distributors being foreclosed from the market because they were unable to gain access to worthwhile products to sell; and

iii) Eliminated intra brand competition where inter-brand competition might be weak.

179. Those criteria as such are not seriously in issue.
180. Mr Ridyard's report was a model of its kind and I found his evidence in particular to be both objective and compelling. He made the following points:

i) Vertical agreements generally provide efficiency gains to the mutual benefit of producer and consumers;

ii) They do not generally give rise to competition concerns in the absence of significant market power hence the Vertical Agreements Regulation(Block Exemption) and Individual Exemption;

iii) Article 3.2 of the Vertical Agreements Regulation requires the focus to be on the level of the market appropriate to the agreement being examined, in this case the upstream market between manufacturer and distributor and not the retail market. Mr Burns approach to the geographic market was therefore "fundamentally flawed".

iv) The market for the purchase of scooters from manufacturers by "top-tier" distributors is and was at least European if not global as all parties are active throughout Europe. The major distributors (whether vertically integrated or not) operated and sold on a pan-European scale. The evidence was that manufacturers charged distributors the same price regardless of where in Europe the products were sold. So too the same or substantially the same products were sold throughout Europe.

v) The evidence did not permit him to express a definite conclusion on whether the relevant market should include power chairs albeit he said Mr Burns conclusions were not justified. The test to be applied was whether a scooter market monopolist would lose enough sales to power chairs if he sought to increase scooter prices as to lose the benefit of the increased price. Included or not makes no difference to Mr Ridyard's conclusions.

vi) DMA had, on the evidence of Dr Harrop and Mr Clay, less than 30% of the European market (with or without power chairs) and that would have been likely to remain the case had the Agreement been renewed.

vii) The Agreement produced competitive benefits as it made it commercially attractive for DMA to invest in marketing and promoting the Shoprider brand, without the risk of a third party or Pihsiang itself appropriating the benefit of the investment, thereby improving distribution and increasing inter-brand competition as recognised by Pihsiang in the March 2001 Prospectus.

viii) Shoprider's low share of the market virtually ruled out the risk of anti-competitive effects. No manufacturers or distributors had been foreclosed from the market. The number of manufacturers had increased dramatically. New entrants had succeeded. Inter-brand competition was strong and effective and the Agreement enhanced Shoprider's ability to compete in that market.

181. I accept these points substantially without qualification. There is really overwhelming evidence that the market (even be it only the UK market) was strongly competitive. Pride was able to enter and succeed. When the Agreement was made both Keep Able and Shoprider were able to find other supplies. When it came to an end, so was DMA. Any UK distributor could source supply from other manufacturers and, as the evidence shows, has often done so.
182. The volume market shares calculated by Mr Ridyard, on the basis of DMA's share as a buyer for the European market and using DMA's historic sales and Dr Harrop's forecasts of future sales and total market size, had the Agreement remained in place, are set out in Figure 6. Whether or not power chairs are included the maximum share is 21% in the year 2015. A similar exercise using Mr Clay's figures so far as they go and his opinion on the likely growth of DMA sales also indicated that DMA's European market share would not have exceeded 30% in future years.
183. Mr Ridyard addressed the length of the Agreement in Section 5.2.2 of his report. As he (and Mr Burns) pointed out "single branding clauses" do not qualify for Block Exemption if they are for longer than five years regardless of the market shares involved. Whether Clause 10 was such a clause he rightly left to the court. Mr Ridyard considered that "from an economic standpoint the length of the Agreement" was "not problematic". The reason for this opinion (apart from his overall views) was that any concern would relate to Pihsiang using its market power to the possible detriment of DMA and "as long as DMA had the option not to renew the contract after five years such concerns should not arise".
184. Mr Ridyard also addressed the four conditions required to be met for individual exemption under Article 81(3) (see paragraph 170). Distribution was improved, enhanced inter-brand competition and improved distribution benefited consumers and there was no possibility of competition being eliminated as the market was not foreclosed and neither DMA nor Pihsiang had sufficient market power to foreclose it. The third condition was not so readily disposed of: "the restrictions are indispensable to the attainment of these objectives". Mr Ridyard's opinion that some exclusive supply obligation was indispensable to the achievement of the objectives is one which I think can readily be accepted. Moreover, granted the need to establish and develop the brand in Europe, I also think a 10 year term conditional on both a minimum sales figure and a best endeavours obligation to increase unit sales year on year can sensibly be so described. What is much more difficult in my judgment is to determine that such an obligation with potentially unlimited five year renewals could sensibly be said to be "indispensable" in the sense the test requires. Mr Ridyard, I think, felt the same difficulty. He wrote of " a period of protection sufficient … to recoup the investment" of the "ongoing need for investments by DMA" and that "periodic renewal arrangements to cover the anticipated further distributor investments provide an appropriate instrument for safeguarding those investments". None of those factors seem to me to provide a compelling case for the indispensability of a contractual right to renew unlimited in the times it can be exercised.

(2) SCOOTER MARKET

185. I mean no disrespect to either Dr Harrop or Mr Clay, both of whom sought properly to assist the court, but I did not in the event derive any great assistance from their evidence other than in respect of matters of some generality. The factual basis of their evidence was on any view very limited; in effect market research among those willing to respond and with very little ability to verify such limited responses as were received. In both cases cross-examination exemplified acknowledged deficiencies in the evidence. As Mr Clay put it, in Clay 1, forecasting market performance beyond 2 to 3 years is very difficult. As Mr Ellison put it, the real or best experts were DMA and Pihsiang and their views on the market before the disputes arose were well documented.
186. Article 9 of the Vertical Agreements Regulation defines the relevant product market as including "goods or services sold by the supplier, which are regarded as interchangeable or substitutable by the buyer, by reason of the products' characteristics, their prices and their intended use". Dr Harrop regarded scooters and power chairs as forming part of the same product market for competition purposes. He did so because, in my summary, (i) they are "very similar and interchangeable products" bought by the same people who can walk at least short distances and can operate the vehicle on their own; (ii) they are usually manufactured supplied and sold by the same outlets; (iii) the prices of power chairs are within the range of scooter prices (iv) sales and promotional literature would commonly deal with both; (v) far more power chair users are able to use scooters than not; and (vi) the great majority of both scooters and power chairs were suitable for both indoor and outdoor use. Mr Hermolle, with his considerable experience, supported all these points. He said that for most potential users most power chairs and scooters were genuine alternatives.
187. Dr Harrop's definition of a relevant geographic market was an area in which the "conditions of competition" were "sufficiently homogenous". Dr Harrop regarded the relevant geographic market at the three different levels as:

i) Global for sales by manufacturers to distributors; the largest source of supply is Taiwan;

ii) European for "master distributors" buying and selling; DMA's main competitors Pride, Invacare and Electric Mobility sell on a European or global basis.

iii) European for purchases by consumers from dealers; the product does not differ much from one country to the next and Dr Harrop referred to mail order and cross-border purchases, (albeit it emerged that there was no real evidence of such purchases).

188. Dr Harrop said the global and European markets were and would remain "highly competitive".
189. Dr Harrop's figures for European market growth based on units sold (not value) past and predicted appear in Table 1 of Harrop 1. By definition the predicted figures have a substantial error factor. The figures show 6% annual growth from 1995 to 1998 but much larger growth thereafter. That growth is attributed by Dr Harrop to the success of micro scooters in 2003 and later years, an increase in the number of the elderly and their disposable income, and better access for mobility vehicles in streets and shops and other buildings. He believed intense competition and improved manufacturing efficiency had resulted in price reductions over the years along the whole supply chain, albeit end users were not focusing primarily on price. It was Dr Harrop's evidence or forecast that whilst the average price ex distributor had fallen and would continue to fall between 1995 and 2005 prices could be expected to stabilise thereafter. In Table 11A of Harrop 1 he set out his forecasts for DMA sales of scooters from 2001 onwards on the basis the Agreement had continued and his estimates of the size of the European market. The Table shows substantial increasing sales between 2001 and 2015 and a DMA European market share rising from 17% to 21% over the same period. The basis for these estimates was, as I think was revealed in cross-examination, very shaky. Dr Harrop's estimate of DMA's actual share of the European market in the years 1995 to 2001 rises from 5% to 17%. He also estimated that DMA grew market share in continental Europe from 2.9% in 1996 to 11.5% in 2000. The figures for actual unit sales in continental Europe made by DMA in the years 1996 to 2001 are to be found in Table 12A of Harrop 1. They are in each year starting in 1996, 603; 937; 1,798; 2,502; 3,207; and 3,558.
190. In Clay 1 Mr Clay expressed his view that the relevant product market was scooters alone because "the products are generally not substitutable and there is little competition between them". Power chairs, he said, cater for "more serious disabilities". In Clay 2 he made a number of further points on this issue. He said scooters were used almost entirely outdoors by the elderly or mildly disabled whereas power chairs were for the more seriously disabled who spend most of their lives in the chair in or close to home. That was reflected in their appearance and mode of operation .
191. Mr Clay agreed that the major European markets were the UK, Germany and the Netherlands. He said that other markets "remain relatively small and largely undeveloped". The figures bear that out.
192. In the UK market Mr Clay considered unit sales between 1995 and 2002 had increased by 10% per year on average. He, however, expected growth to continue but to fall to 7% per year after around 2003 because the "market will become more saturated". He also noted that "prices have continuously fallen since 1995 due to increased competition and a greater variety of scooters available", but believed that they would not fall further after 2007. In his figure 4-1 he calculated revenue growth rates falling from 7% in 1997 to 4% on 2001, 3% in 2003 and rising to 5% in 2007.
193. Mr Clay's evidence about UK market shares in Figure 4-2 of Clay 1 (Shoprider 30% in 1998 rising to 35% in 2002) was I think, and as he acknowledged, seriously exposed as lacking any real foundation. It was said to be based on "primary research" but the evidence of the research exhibited to Clay 1 was insufficient to justify any reliable conclusions. The difference in Dr Harrop's and Mr Clay's market share figures is largely explained by their different assessments of the size of the market. Mr Clay also based his figures on value not unit sales.
194. In Clay 2 Mr Clay addressed the relevant geographic market. He considered each country in Europe to be a separate market applying the same definition as Dr Harrop. The basis for this opinion was his view that average retail prices for scooters differed in the three main markets (albeit he acknowledged in Holland purchases were generally of higher specification product); sales were generally only made by local dealers; manufacturers and distributors had set up "local presences" to penetrate the markets; and many countries had seen little development because the terrain was not suitable to scooters and because of strong disability stigmas. But he accepted in cross-examination that the "big four" (DMA, Invacare, Sunrise Medical and Pride) distributed most of the scooters sold in Europe and at least three of them did so in each of the UK, Holland and Germany and his views, like those of Mr Burns, were focused on the retail market not the wholesale market.
195. Mr Clay also addressed DMA's profit margins and, on the basis of Bolton 1, concluded that the gross profit margins ranged between 26% and 29.2% over the 5 years ending 31 March 2001. Mr Clay questioned whether the market was "highly competitive" rather than "competitive". In Clay 2 he also set out in a Table in paragraph 6.3 the various estimates of the size of the European scooter market between 1995 and 2011 which demonstrates that for the years 2000 onwards his own and Dr Harrop's figures part company radically with the gap ever increasing and with his own figures being vastly below those of Dr Harrop.
196. As I have already said, and as both experts acknowledged, the forecasting exercise they addressed is inevitably speculative. The court can, I think, safely conclude from their evidence only that (i) the European market was growing strongly and would continue to do so (ii) it was a strongly competitive market (iii) Pihsiang and DMA working together were well placed to take advantage of the growth and to tackle the competition as they had consistently out-performed the market, and (iv) the likely overall size of the market would fall somewhere between the figures given by the experts, each of whom had valid points to make in support of their approach.
197. On other issues, I preferred Dr Harrop's evidence, (in particular read with the long and direct experience of Mr Hermolle) to the effect that power chairs and scooters were properly to be viewed as forming part of the same product market: the market itself treated them as such at every level, albeit to some limited extent I also accept that some disabilities could be assisted by a power chair where a scooter would not be appropriate. On the relevant geographic market I prefer the views of Mr Ridyard substantially for the reasons he gave: see paragraphs 180 and 181

(3) FORENSIC ACCOUNTANTS

198. There was in my judgment a very marked difference in the quality of the expert accounting evidence. Mr Ellison prepared reports, in the case of Ellison 3 under very severe time pressure, which were thoroughly professional and objective. He gave his evidence in the same manner. Mr Bolton, I regret to say, appeared in some important respects to have as his target sustaining Pihsiang's case with whatever arguments he could muster. Nor can his changes of view between his reports be explained as he sought to do on the basis of changes in the information available.
199. There was a measure of agreement between the experts which is set out in two documents dated 28 March and 24 October 2003. The latter also helpfully set out (as at that time) "matters disagreed". They agreed the overall approach to the calculation of DMA's loss of profits was to apply the applicable margin to forecast lost turnover from the sale of scooters and then deduct profits from mitigation. One of the major differences of approach to the forecast of future unit sales and prices was that Mr Ellison considered the actual sales figures in the first years of the Agreement and the parties' own contemporaneous forecasts (such as to be found in DMA's strategy documents and Pihsiang's Prospectuses) to be basic and important sources of information whereas Mr Bolton, for reasons I found impossible to follow, gave very little weight to them. They agreed that unit sales would continue to increase but prices would decrease but as Mr Ellison said both scooter experts forecast the unit sales increase to be much larger than the forecast price decrease resulting in a substantial increase in forecast revenue. Mr Bolton in Bolton 1 described the pattern of growth over the period 1996 to 2001 as one of "growth and decline". That was quite wrong. Apart from a "slight dip" in 1998/9 (probably attributable to Pride entering the market) Mr Ellison was plainly right to say that the figures showed consistent and rapid continuous growth with a CAGR of 24/22% depending on whether power chairs were included. Mr Ellison took as the appropriate profit margin for DMA unit sales 23% and 5% for sales to Casacare giving an effective rate of 20%. Mr Bolton's figures had not been finalised at the time of the 24 October document.
200. The experts were agreed that any loss calculated after judgment date should be discounted to take account of the true value of money and risk. Mr Ellison put forward alternative figures for the court's consideration (8%, 10%, 12%). Mr Bolton started at 6.9%, moved to 15%, and subsequently appeared to agree 10%. Mr Bolton thought, however, that the rate should be increased to reflect increased risks for further renewals. Mr Ellison said he had dealt with that by assuming no growth at all in his calculations after 2006 or 2011 as the case might be.
201. As regards the counterclaim, Mr Ellison considered no loss by Pihsiang had been demonstrated. Mr Bolton put forward a growth rate of 28.5% which, as Mr Ellison disarmingly said, sat oddly with his 8% rate (albeit for a different but immediately following period) in assessing the claim. Moreover Mr Bolton included lost sales in the UK in his original calculation when no claim was even made in that regard.
202. In Ellison 1, prepared before the scooter experts had reported, Mr Ellison restricted his calculations to a maximum of 3 renewals and so up to and including a fourth 5-year term of the Agreement ending on 5 February 2016. He did so on the simple and plainly realistic basis that the likelihood of renewals became increasingly speculative pointing out also that the effect of discounting made the sums involved in any later renewals much less significant.
203. Mr Ellison's conclusions on his analysis of the historic information of actual sales and forecasts are set out in Section 9 of Ellison 1. His approach was cautious in excluding the initial historic surge in growth and he applied a CAGR of 14% for DMA. Mr Ellison's sales price forecast appears in Section 9.3 and recognises that prices were falling. In Section 12 he analysed DMA's margin on sales. Putting these figures together the loss calculated by Mr Ellison was set out in Figure 26 of Ellison 1 on two bases: one assuming no growth in sales after 5 February 2006 and the other no growth after 5 February 2011.
204. Mr Ellison also sought to assess the costs 'saved' by DMA through not making the sales of Shoprider which he had estimated. DMA had intended to build but in the event did not build a new warehouse to store Pihsiang's goods. The contract value was £1.4m and he made allowance for the saving and for non-payment of the $100,000 renewal fees. Apart from those matters, it was his conclusion that DMA had not saved any costs by reason of the termination.
205. Mitigation of loss was addressed in Section 14 of Ellison 1. His assessment of the returns from sales of Merits scooters over the various renewed periods appear in Figure 31.
206. Mr Ellison's total figures for the claim, with the various alternatives he addressed, are set out in Figures 34 to 37 of Ellison 1. His figures for the loss at 5 February 2006, including both scooters and power chairs and applying an 8% discount was £13.7m, and for two renewals £25.7m.
207. Mr Bolton, at paragraphs 3.66 and 5.5 of Bolton 1, using his mid-range profit margin for DMA of 12%, produced a figure of £3.099m for DMA's loss to 5 February 2006. The major reasons for the difference were different views of growth in sales and prices and in the approach to DMA's overheads which Mr Bolton took to be directly variable with turnover. The figure Mr Bolton then put on the counterclaim for DMA's alleged sales failures was £4.278m.
208. At the time he prepared Ellison 2 Mr Ellison had Bolton 1, Harrop 1 and Clay1 and the other further information to which he there refers. As he said "his conclusions remain(ed) broadly unchanged". Ellison 2 is sharply critical of Bolton 1. I agree with the criticisms. Mr Ellison made some small adjustments to his overall figures and also produced figures for scooters as well as scooters and power chairs. His revised figures are set out in Figure 4 of Ellison 2. These figures on the basis of one renewal, scooters only, and a discount rate of 8% and interest rate of 1% over base rate are £10.8m and for two renewals £23.1m. Mr Ellison also recalculated the claim based on both Dr Harrop's and Mr Clay's forecast figures for unit sales and average sale price growth. The comparable figures were £10.4m and £24.2m (Harrop) and £9.4m and £17.4m (Clay).
209. In Bolton 2, Mr Bolton addressed Ellison 1, Clay 1 and Harrop 1 and

i) Acknowledged he had not adequately covered "commercial risk" in his first report and sought to do so by increasing the discount rate from 6.9% to 15%;

ii) Despite that, and seeking to apply Mr Clay's figures, increased his estimate of the loss albeit by fairly modest amounts (see the summary at paragraph 6.20); and

iii) Supported a counterclaim in much the same amount as in his first report taking Pihsiang's gross profit margin at 40%

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

i) Revised his analysis of DMA's overheads and historic profit margins in the years 1997 to 2001 to show an increased range between 19.2% to 22.4% or, on the figures I find to be more accurate, 19.7% to 22.2%;

ii) Nonetheless concluded margins were falling and would continue to do so ("margin squeeze") with the fall being borne 2:1 Pihsiang/DMA because of the ratio of their historic profit margins and assuming no change in volume or Pihsiang's manufacturing cost or in dealer margins;

iii) Produced claim figures on the basis of Mr Clay's reports which were not much different from Bolton 1 and 2 and which on the basis of Dr Harrop's reports were much reduced. The figures are set out in Figure 2 to Ellison 3.

iv) Revised the amount of the counterclaim to exclude power chairs and UK sales, producing a claim on the figures for sales taken from Mr Wu's witness statement of only £158,000 with interest of £37,000.

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

i) Mr Bolton's opinion on margin squeeze relied on information which had been available at the time of Bolton 2. It of course had the effect that whilst his figures for DMA's historic margin had to be revised substantially upwards the future margin was substantially reduced (to about 8%) for his revised loss calculations;

ii) Mr Bolton himself accepted in cross-examination he had in any event wrongly ignored the prospect of the development of a cheaper product such as the microscooter and that some of any lost margin would be borne by dealers;

iii) The evidence is clear for historic sales that despite falling prices both Pihsiang and DMA maintained their margins (40% and 20% respectively);

iv) Annual sales tripled over the period from 1996 to 2002: both Pihsiang (in the prospectuses) and DMA (in their strategy documents) were predicting this would continue.

v) There is nothing inherently surprising about maintaining percentage margins when average prices fall albeit the amount of actual return per unit is of course reduced (20% of £800 not £1000); indeed microscooters were cheaper which itself would account for falls in average prices;

vi) Mr Ellison had examined DMA's audited financial statements ("a reality check") which supported the fact that the company (in contrast to DCC) had suffered a fall in operating profit in 2002 of some £0.9m and in 2003 of £4.4m by comparison to the year 2001 (the last unaffected year before the dispute). Yet Mr Bolton's latest figures showed a gain for DMA in 2002 as a result of the termination of the Agreement in part because DMA's actual sales and margins were higher than the forecasts deduced by Mr Bolton.

vii) Mr Ellison, in Figure 4, showed how Mr Bolton's margin figures in Bolton 3 were still understated but when adjusted were close to his own and did not support a falling trend.

viii) Mr Ellison said of the counterclaim "given that in every year of the Agreement DMA's sales in Europe (excluding the UK) not only grew but grew faster than the market according to … Mr Clay, whose views he (i.e. Mr Bolton) prefers when dealing with DMA's claim, I do not presently see how there is any quantum of counterclaim to be calculated". The figures are shown in bar chart form in Ellison 3. They show, on Mr Clay's estimates of market size, DMA's market share increasing in each year in the period 1996 to 2000 and rising from 3.9% to 15.6% between the beginning and end of the period. Based on Dr Harrop's estimates of market size the figures also show a consistent increase albeit at a slower rate: paragraph 189.

212. Mr Ellison also pointed out how difficult was the correct assessment of mitigation and in particular an assessment of DMA's returns from the sales of Merits and Kymco scooters. The latest figures showed more sales than Mr Ellison had allowed for and he therefore believed his overall figures for quantum in Ellison 2 might be overstated by some 5%.
213. In Figure 6 of Ellison 3 Mr Ellison helpfully summarised his opinions which, with limited adjustments, remained unshaken in cross-examination and, in my judgment, entirely persuasive subject of course to the legal and factual issues which arise in relation to the number of renewals. In the course of his evidence Mr Ellison accepted, subject to the court's views, a discount rate of 10% was appropriate (rather than 8% in his figure 6) and, as I have stated, the warranty element is now to be omitted. With these adjustments, and excluding any interest, Mr Auld prepared a short summary of Mr Ellison's final views which he distributed on the final day of the hearing. It is my understanding that it is accurate as a representation of those views. It shows (in sterling) a cumulative loss to DMA:

Period To	Amount Scooters	Amount Scooters/Chairs	Including Mitigation Costs	Including Mitigation Costs
Merits	KYMCO	KYMCO	KYMCO	KYMCO
05/02/06	10.2m	11.0m	0.6m	0.6m
05/02/11	20.4m	22.2m	0.6m	0.6m
05/02/16	27.5m	30.0m	0.6m	0.6m

214. Of the major issues which arose:

i) I find Mr Ellison's forecasts of future growth rates of sales had the Agreement continued far the most persuasive taking account as they do of historic trends and the forecasts of both Pihsiang and DMA.

ii) It is now virtually common ground that DMA's historic margins were not falling and were around 21-23% before termination.

iii) I reject totally Mr Bolton's "margin squeeze" approach to DMA's future margins. There is no justification for it in any contemporaneous material. I accept Mr Ellison's approach that the probability is that margins would have remained at 23% for sales to third parties and 5% for sales to Casacare.

iv) The approach of Mr Ellison to overheads is now accepted by Mr Bolton.

v) A discount rate of 10% is appropriate for at least the periods to 5 February 2016.

215. I would add that an interest rate of 1% over base rate would reflect the normal rate in this court for a claim calculated in sterling and so, if and where relevant, it should be applied. I have also decided that the Kymco costs of mitigation should be £300,000 not £600,000: paragraph 150.
RESTRAINT OF TRADE
216. DMA submits that the restraint of trade doctrine is of no application to the Agreement for any one of three reasons:

i) The Agreement is an international, wholesale exclusive distribution agreement of a well recognised commercial type in which the impugned obligations are those of a Taiwanese manufacturing company;

ii) The restraints are in any event reasonable and enforceable, or if and insofar as not they are severable.

iii) If, as DMA submits, Community competition law allows or approves the Agreement that conclusion cannot be undermined by a contradictory or incompatible national law which seeks to address the same concerns.

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

Does the doctrine apply?

218. The leading authority is the decision of the House of Lords in Esso Petroleum Ltd v Harpers Garage [1968] AC 269. The doctrine was applied to exclusive (tied) petrol supply contracts with two garages. Both contracts also contained resale price restrictions which were not in fact enforced. One was for a term of 4 years and 5 months; the other for a term of 21 years. The House held the agreements were in restraint of trade because the garages had given up their previous right to sell other petrol. The shorter agreement was nonetheless held to be valid because it was no longer than necessary to afford adequate protection to the legitimate interest of Esso in maintaining a stable system of distribution; the longer agreement was held to be void "in the absence of evidence of some advantage to (Esso) for which a shorter period would not be adequate".
219. The agreements in Esso were, of course, operative at the retail level of the market and imposed restraints on parties operating in that market. The relevant restraints in the Agreement, as Mr Mill acknowledged, are those on Pihsiang at the wholesale level which limits Pihsiang from selling its scooters to any party but DMA for onward sales in Europe.
220. There are no relevant restraints on the sales by DMA within Europe. DMA gave up the freedom it otherwise had to buy scooters from any manufacturer other than Pihsiang but DMA does not complain about that restriction on its business.
221. The House of Lords did not attempt to define contracts which are and contracts which are not in restraint of trade: Lord Reid at pages 298-9; Lord Pearce at page 324; and Lord Wilberforce at page 331-2. If one searches for clues they are somewhat limited in number and application. Lord Hodson (at page 318) said the basis of the doctrine "is the protection of the public interest". Lord Pearce (at page 328) said "the doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract" and that when "the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises". Lord Wilberforce (at page 331) said "the doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason", taking into account "the wider aspects of commerce … as well as the narrower aspect of the contract as between the parties". Whilst there was also unanimity of view that where experienced traders bargained on equal terms and agreed to a restraint which seemed good to them the court should be very slow in deciding that it knew better than they did what was in their commercial interest whether that was a factor to be applied at the "application of the doctrine" or "reasonableness" stage of the question is less clear.
222. In Panayiotou v Sony Music [1994] EMLR 245 Jonathan Parker J reviewed the authorities on the doctrine. As Jonathan Parker J said (at page 320) there is a public interest in freedom of contract as well as freedom of trade. There is also a potential tension between the two. As he also said (at page 321) the first question is whether the contract attracts the doctrine because it is "in restraint of trade" using that expression "as a term of art covering those contracts which are to be regarded as offending a rule of public policy" but (at page 327) "the right approach for the court, once it is satisfied that the contract before it is a contract which is (in ordinary parlance) in restraint of trade, is to consider whether in all the circumstances sufficient grounds exist for excluding that contract from the application of the doctrine".
223. Armed with this avowedly uncertain guidance, I do not find the matter an easy one. It is open to question whether English public policy should concern itself at all with the restrictions agreed by Pihsiang. The Agreement itself is of a recognised and usual type intended for the mutual benefit of two equally astute commercial parties. It applied across Europe and so to countries which may well have no equivalent of English law in this area. DMA was investing a substantial sum to "buy" exclusivity and further sums to promote Shoprider for which exclusivity was the security. The target was successful inter-brand competition and brand development. Nor do I think that if the Agreement is to be construed as I have construed it (for a 10-year term) there is anything exceptional about its terms such as would justify the attraction of the doctrine. Indeed the contrary was not submitted. The restraint on Pihsiang would then have a finite and I think normal term for such a substantial undertaking and would come to an end with the Agreement.
224. But if the Agreement is to be construed as one entitling DMA to renew it every five years for the rest of time subject only to the conditions of Clause 10 then I think the conclusion that it not only contained a restraint on Pihsiang's freedom to trade in the UK (as well as continental Europe) but did so in a manner which was unusual or exceptional is almost unavoidable. The Agreement would then in my judgment be subject to the doctrine and so require to be justified as reasonable between the parties. As Mr Mill submitted the right to renew was granted only to DMA and if exercised Pihsiang was under the positive obligation to supply scooters to DMA at all times and at the lowest price payable by any distributor (Clause 6).

Are the restraints reasonable?

225. It does not matter to the outcome whether the Agreement falls outside the application of the doctrine or satisfies the reasonableness test. In my judgment a 10-year agreement would satisfy the test. The court must assess the terms at the time the Agreement was entered into: see paragraph 237 below. It is for DMA to establish that the restraint is reasonable. Building a successful brand and meeting inter-brand competition required both time and the investment of money. DMA was entitled to protect its investment and to reap the rewards of success if it succeeded. That was a commercial deal about which the court should indeed accept that the parties were the best judges of their own interests in making it. Pihsiang's own interests in making such an Agreement are spelt out in the March 2001 Prospectus. But I also think if the Agreement is to be construed as entitling DMA to renew every five years for the rest of time that goes much further than any legitimate interest DMA could have or was entitled to protect. It would be tantamount to imposing a lifetime restriction and potentially a way of avoiding the consequences of the greater legal distaste for restraints which apply after an agreement has ended.
226. It follows, therefore, that in my judgment the Agreement escapes the application of the doctrine of restraint of trade or is justified if the doctrine does apply to it only if it is a 10-year Agreement. If it is not, and DMA's right to renew every 5 years is only circumscribed by the provisions preceding it in Clause 10 of the Agreement, then subject to questions of severance and compatibility with Community Law, the doctrine both applies and renders the Agreement void.

Severance

227. In relation to Clause 10, severance could, if available, achieve one of two results. If the final sentence of Clause 10 should be read as effective as it stands, it could be severed in its entirety, producing the same result as in my judgment (paragraph 82) arises as a matter of the application of the principles in Davies v Davies but by another route. It could, in the alternative, be severed simply by removing the last seven words producing the result of an unqualified (by any "law") right of renewal for DMA every five years. Either result could be achieved by use of a "blue pencil".
228. DMA has contended in its pleadings and submissions that the mutual exclusive obligations in Clauses 3 and 4 of the Agreement could themselves be severed. But I agree with Mr Mill, and indeed the whole tenor of DMA's evidence, that exclusivity was the rationale of and central to the Agreement. Severance is not available to remake a contract or to change the character of a contract. It was exclusivity for which DMA agreed to make the capital payments.
229. DMA made no submissions directed to severance of the final sentence of Clause 10, albeit it is that sentence, if it is effective, which in my judgment brings into consideration the doctrine of restraint of trade and fails the reasonableness test. It is not exclusivity itself which is objectionable but the real potential for it to continue indefinitely. Absent any submission by DMA on Clause 10 I do not think it right to consider the matter further.
ARTICLE 81: JUDGMENT
230. The terms of Article 81 and the material Regulations are set out in paragraphs 156 to 170. It is common ground that the Agreement had an actual or potential effect on trade between Member States.

"OBJECT"

231. Pihsiang submits that the Agreement had as its object "the prevention, restriction or distortion of competition". To quote Pihsiang's Closing Submissions (paragraph 146) "the main object of the Agreement was to confer absolute territorial protection on DMA within the very wide contract territory" and "a further object was to perpetuate the fragmented nature of the national markets within the EC, thus confirming the segregation of the dominant UK market".
232. In my judgment, the second of these supposed "objects" derives no support at all from the terms of the Agreement, which apply indiscriminately to the stated European countries, and if the first was sufficient simply as so expressed it would mean that any European-wide vertical distribution agreement containing mutual exclusivity would be within Article 81(1), whereas I accept Mr Green's submission that the competitive advantages perceived to derive from such agreements are such that at least prima facie far from having an anti-competitive object they are considered to be beneficial to competition: Delimitis v Henninger Brau AG [1991] ECR 1-935 at paragraphs 10-13. There was, moreover, nothing in the Agreement to prevent purchasers or sub-purchasers from DMA stocking or selling other brands of scooters nor from selling Shoprider scooters to any purchaser wherever situate at any price or on any terms. At that level of the market there was no restriction on intra-brand competition. Most of the authorities on which Mr Beal placed reliance were instances where an agreement sought to protect one part of the common market from another for example by preventing a distributor in France from re-exporting a product to Germany. Granted that the parties to a European-wide vertical agreement have a mutual interest in promoting sales of the relevant product and, in this case, the overwhelming evidence that inter-brand competition was strong and effective and the market open to new entry, I do not think the terms of the Agreement itself in its factual and economic context can properly lead to a conclusion that its object was within Article 81(1) whatever the proper construction of Clause 10. The Agreement contained none of the "hard-core" restrictions (on prices or production levels or the like) which may also lead to the application of Article 81(1). The target of both Pihsiang and DMA was to promote inter-brand competition.
233. It was, I think, in part recognition of this basic problem in Pihsiang's case that at a very late stage in the proceedings it was submitted that DMA could not properly rely on the European scope of the Agreement because it would amount to an abuse of rights for it to do so. The basis for the submission on abuse of rights is the assertion that DMA was in reality seeking to protect the UK market (or the UK, Dutch and German markets) from parallel imports and the inclusion of the other European countries in the Annexe to the Agreement was an artificial construct created for no other reason than to secure that protection.
234. In case C-110/99 Emsland-Starke GmbH v Hauptzollampt Hamburg-Jonas [2002] E.C.R. 1-11569, the ECJ at paragraphs 52 to 54 stated:

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

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

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

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

"EFFECT"

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

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

238. Mr Burns and Mr Ridyard were agreed that whether or not a vertical exclusive agreement falls within Article 81(1) depended upon whether the exclusivity created substantial foreclosure to the market. The "foreclosure" test was emphasised in Delimitis and by Park J in Crehan v Courage [2003] EWHC 1510 (26 June 2003 at paragraph 150). The relevant market in this case, in agreement with Mr Ridyard, is, I think, the market for supplies by manufacturers to "top-tier" or main distributors: the wholesale distribution market.
239. The evidence is substantially undisputed. Manufacturers sell scooters on a global basis and top-tier distributors purchase on a global basis. There is no shortage of manufacturers. Most, if not all, the scooters distributed in Europe are manufactured outside Europe. The major distributors (some of which are also manufacturers) also sell throughout Europe. In his evidence Mr Ridyard framed the foreclosure question in these terms: "Does the fact that Pihsiang is obliged to supply its products only to DMA remove opportunities to other competing top-tier distributors to such an extent that they are unable to compete effectively in the marketplace?" That is not to ignore the downstream market but to focus on the level of the market where the relevant and in this case only restriction applies.
240. It is no surprise that Pihsiang placed less emphasis on "effect". The evidence is overwhelming that the answer to Mr Ridyard's question is "No". The Agreement did not have any significant anti-competitive effect. The market (at all levels) was not foreclosed or difficult to enter. Competition was strong, effective and increasing throughout Europe. Prices were falling. There is no evidence at all that any potential market entrant was deterred by the existence of the Agreement. It is not suggested that DMA ever in fact achieved during the operation of the Agreement a dominant market share even in the UK let alone Europe.
241. Mr Beal submitted that an acid test of the anti-competitive effect of the Agreement was to examine the market before it was made and the effect of the Agreement upon that market and to repeat the examination when the Agreement terminated. But I do not think Pihsiang derive any assistance from such examinations. True, in 1996, the other UK distributors of Shoprider sought supplies from other sources but they duly obtained them. There is also evidence that when RMA began to replace DMA in 2001 it reduced the prices of Shoprider scooters. But Pihsiang reduced its prices to RMA and DMA was disposing of its substantial Shoprider stock holdings at reduced prices. Moreover DMA found a new short-term supplier (Merits) and was able to develop and now to market a long-term alternative with Kymco.
242. In my judgment therefore the Agreement also did not fall within Article 81(1) by reason of its "effect".
243. It follows that I accept DMA's submissions that Article 81(1) did not render the Agreement void.

ARTICLE 81(3) THE VERTICAL AGREEMENTS REGULATION

244. If my conclusion on Article 81(1) is correct the question whether or not the Agreement would have benefitted from exemption under the Vertical Agreements Regulation (which came into force on 1 January 2000 and took effect from 1 June 2000) does not arise. Nonetheless I should address it not only because my conclusion may be appealed but also because the answer may affect the operation of the common law doctrine of restraint of trade.
245. It is Pihsiang's submission that the court should first consider whether the Agreement complied with the Exclusive Distribution Block Exemption Regulation 1983/83. That was the Block Exemption (as amended) in force at the time the Agreement was made and which was replaced by the Vertical Agreements Regulation with effect from 1 June 2000. DMA has not sought to submit that the Agreement did comply with this Regulation but does submit that the question is of no relevance because if the Agreement was exempted by the later Regulation then there would be no Community law barrier to DMA's claim which is for damages for losses in 2001 and subsequent years. That said, I accept Mr Beal's submission that the Agreement did not comply with Regulation 1983/83 at least because of the inclusion in it of the restriction on Pihsiang from permitting any of its distributors outside the Annexe European territories from making supplies to the territory: Article 2(1). I also accept Mr Beal's submission that the Agreement could not be saved from this conclusion by "severance": the ability to sever is governed by national law. Article 2(1) was an essential commercial provision of the Agreement.
246. It was this submission by Pihsiang which in particular gave rise to questions whether, assuming it would apply to exempt the Agreement when it came into force, the Vertical Agreements Regulation could operate to "cure" an Agreement otherwise "automatically void" under Article 81(2). There is nothing in the Vertical Agreements Regulation itself which expressly addresses the question. Mr Beal submitted that DMA needed to establish "retroactive exemption" and Community law presumed legislation was not retroactive absent express words.
247. It is DMA's submission that the Vertical Agreements Regulation itself, once in force, can validate the Agreement or terminate its invalidity and not that retroactive validation is necessary. In Passmore v Moreland [1999] 3 All E.R. 1005 the Court of Appeal held that a beer tie agreed with a publican which was assumed to be void under Article 81(1) whilst company A was landlord ceased to be so when company B became landlord and entitled to the benefit of the tie. Whilst it is true that there is no comparable change of party in this case, the reasoning of Chadwick LJ in my judgment is not so limited: see in particular pages 1014 to 1015 and 1020. Nor do I think, as Mr Beal submitted, that the decision is inconsistent with the ECJ's decision in Courage Ltd v Crehan [2002] QB 507. Whatever the position during a period of invalidity this court is concerned with a period when, if it meets its terms, the Agreement would be valid pursuant to the Vertical Agreements Regulation which would not affect the rights of parties during any period of invalidity.
248. The question is, therefore, whether or not the Agreement was entitled to exemption under the Regulation. To be so the Agreement must meet the criteria I have summarised in paragraphs 165 to 168. In addressing the criterion of 30% of market share I have already concluded that the relevant product market is the market for scooters and power chairs and the relevant geographic market Europe (paragraph 197). On that basis DMA did not have and would have been unlikely to achieve a 30% European market share even had the Agreement continued in force: paragraph 180(vi). Indeed I think on the balance of the evidence the same would be true in relation to the UK market share alone.
249. The difficulty for DMA, however, arises from Article 5(a) (paragraph 168). On any view of Clause 10 the exclusivity restriction exceeded a period of 5 years as there defined: it was expressly renewable beyond that period. Mr Green submitted that the relevant "non-compete obligation" was to be found in Clause 3 of the Agreement whereby DMA could only sell scooters manufactured by Pihsiang and if necessary that obligation could be severed. I cannot accept that. Clause 3 was an essential commercial provision of the Agreement. It is for this reason, and only this reason, that in my judgment DMA has failed to establish that the Agreement would have been exempted from Article 81(1) by reason of the Vertical Agreements Regulation.

ARTICLE 81(3): INDIVIDUAL EXEMPTION

250. The provisions of Article 81(3) are stated in paragraphs 158 and 159 above. DMA's submission is set out in paragraphs 169 and 170.
251. Exemption under Article 81(3) required notification until Council Regulation 1216/1999 came into force on 18 June 1999. That Regulation exempted all vertical agreements from the notification requirement. The jurisdiction to grant exemption presently lies with the Commission. It extends to retrospective exemption. From 1 May 2004 the domestic courts of this country will have jurisdiction to grant exemption. Mr Beal submitted, citing Delimitis at paragraphs 50 and 51, that in these circumstances there was no jurisdiction for this court even to address the issue of individual exemption at least unless the matter was one which the court concluded was not open to any serious debate. However that submission seems to me to ignore the fact that one of the issues in these proceedings involves an assessment of whether or not the Agreement was void under Community law, and, if it had been challenged as such, what the outcome would have been. I do not doubt that Mr Beal is right that if a decision of the Commission were sought today the Commission might well take the view that there was insufficient interest in addressing the question in relation to an Agreement which has terminated. Nonetheless, and at risk of trespassing, I think this court must still attempt to make an assessment of the likely outcome had individual exemption been sought. If it would have been granted as a matter of probability then I think DMA would be entitled to ask the court to take that into account in evaluating its claim.
252. But I am not satisfied that DMA has shown that the Agreement satisfies the four conditions for individual exemption. I accept Mr Ridyard's evidence (paragraph 184) that the two positive objectives were met. I also think the second negative condition was met. But for the reasons expressed in paragraph 184 I do not accept that an unlimited right of renewal (if Clause 10 was such) on the exclusive terms of the Agreement can be said to be indispensable to the attainment of the positive objectives.
CONCLUSIONS ON ARTICLE 81
253. It follows that DMA's case on Article 81(3) fails. The Agreement escapes Article 81(1) only because neither its object nor effect were anti-competitive. I am conscious that it can of course be said that there is an illogicality in these conclusions: if the Agreement does not satisfy the requirement of block or individual exemption that must be because the respect or respects in which it fails to do so involves anti-competitive effects (or objects). But, in agreement with Mr Green's submission, I do not think that is so. The exemptions are not exclusive nor is it to be assumed that vertical agreements which do not satisfy their terms are by that very fact in breach of Article 81. For example it does not follow that where parties have a 35% market share a vertical agreement would necessarily infringe Article 81. The very fact that Article 81 addresses the "effect" of an Agreement must, I think, leave open an assessment of the operation of any particular agreement in the context in which the question arises.
IS THE COURT PRECLUDED FROM APPLYING THE RESTRAINT OF TRADE DOCTRINE AS A MATTER OF EC LAW AND IF SO TO WHAT EXTENT AND FOR WHAT PERIOD?
254. It is this question which is perhaps of greater general interest. It would, I suspect, come as something of a surprise to many practitioners if it were the case that the common law doctrine of restraint of trade even in the non-employment field had been emasculated let alone trumped by Community competition law. But if my conclusions on the common law and Article 81 are right and the Agreement was subject to unlimited renewals the court is faced with an Agreement which infringes the common law but not Article 81 when, as it seems to me, the particular concern of the common law involved is indeed a restraint on trade in a context which may be said to be no more than earlier language for the restraint on competition at which Article 81 is aimed. As I have already said (paragraph 237) the fact that the common law examines the issue in the terms of possibilities at the date of the agreement but Community law permits a more pragmatic approach to the effect of an agreement in practice may and in this case in my judgment does result in a different conclusion. There is, I think, an artificiality about the "once and for all" common law approach which at least granted the agreement passes the "object" test Community law avoids.
255. Mr Beal submitted, citing the 11^th Edition of Treitel's The Law of Contract at page 477, that the two laws had, at least in part, different objectives. The common law's concern was the perceived public policy in ensuring personal freedom to trade and hence its distaste for long-term agreements. It was not a "competition law". Community Law, in contrast, was concerned with competition and so recognised that agreements whilst restrictive on personal freedoms may nonetheless promote competition and so benefit consumers.
256. It was Mr Green's submission that where Community law "allows" or "authorises" an agreement which does affect trade between Member States to operate free of regulation then any otherwise inconsistent national law is excluded. In other words granted an agreement of the present type falls within the jurisdiction of Community law under Article 81 only Community law can provide for its validity or invalidity.
257. Mr Beal also submitted that "mere non-application" of Article 81(1) would not oust the common law and even if the Agreement was (which I have held it was not) entitled to exemption the common law would only be incompatible with Community law if it prevented the exemption from having full force and effect. Insofar as Mr Beal re-iterated the "abuse of right" submission in this context it fails in my judgment for the reasons I have already expressed.
258. The starting point for these submissions is the decision of the ECJ in Case 14/68 Walt Wilhelm [1969] ECR 1 which established the basic principle of the supremacy of Community law in this field. Paragraphs 4 to 7 of the decision read:

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

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

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

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

259. In Giry and Guerlain [1980] ECR 2327 the ECJ decided that an administrative letter informing an undertaking of the Commission's opinion that there was no need for the Commission to take any action in respect of certain agreements and to close the file did not have the result of preventing national authorities from applying to the agreements provisions of national competition law which might be more rigorous than Community law. But the basis for the decision was that the letters were not themselves decisions either granting exemption or on the application of Article (then) 85: see paragraph 12. Walt Wilhelm was cited with approval but therefore not in point.
260. In Case C-70/93 BMW [1995] ECR 1 3439 Advocate General Tesauro identified as a potential issue whether an exempt agreement could nevertheless be prohibited under national competition legislation. The court itself decided the case on other grounds and expressly declined to answer the question. Advocate General Tesauro was clearly of the opinion (paragraphs 38 and 39) based on Walt Wilhelm that since the agreements there in question were liable to affect trade between Member States and therefore fell in principle within the prohibition in (then) Article 85(1) "the exemption granted to them cannot but prevent the national authorities from ignoring the positive assessment put on them by the Community authorities". His opinion was the same whether the agreements were protected by individual exemption or an exempting regulation: "A national court is therefore bound not to take decisions which are incompatible with the provisions of an exempting regulation by extending its scope to cover agreements not covered by it or disregarding its scope in relation to the agreements which are covered by the exemption …"
261. Thus far, however, the key to incompatibility could fairly be said to require the positive approval of the agreement by way of a decision that they were exempted from Article 81. On my findings that would not assist DMA in this case.
262. However in Case C-266/93 Bundeskartellamt v Volkswagen and VAG Leasing Advocate General Tesauro addressed the question whether there was a conflict between Community and national competition law "not only where an exemption is granted … but also where the conduct at issue does not fall within the prohibition laid down in (then) Article 85(1)". Once again, the ECJ did not find it necessary to answer the question. Advocate General Tesauro, in paragraphs 58 and 59 of his Opinion, wrote:

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

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

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

263. That Opinion in effect addresses the issue with which, on my findings, I am confronted. The logic of applying the same principles in a case to which an exemption applies to a case in which Article 81(1) is held not to apply at all because the relevant agreement is found not to have an anti-competitive effect and so not to 'need' exemption is to my mind inescapable.
264. Finally Article 3 of the Modernisation Regulation is entitled "relationship between Articles 81 and 82 of the Treaty and national competition laws". Article 3 provides:

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

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

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

265. Although the Modernisation Regulation came into force only on 5 January 2003 and does not apply until 1 May 2004, Mr Green submitted and I accept that these provisions had their origin in Advocate General Tesauro's Opinion in the Volkswagen Case and that, as subordinate legislation, they were required to reflect general Community law derived from the Treaty. The qualification in paragraph 3 of Article 3 was, he submitted and I also accept, aimed at consumer protection laws relating to unfair contract terms and the like. Whatever characterisation may be given to the common law doctrine of restraint of trade and despite Mr Beal's submission to the contrary I do not think it can be said predominantly to pursue an objective different from Articles 81 and 82. A reflection of the close relationship of the two can be found in WWF v World Wrestling Foundation [2002] EWCA CIV 196 in the judgment of Carnwath LJ at paragraphs 64 and 66, and in Apple Corps Limited v Apple Computer Inc in the judgment of Nicholls LJ at paragraphs 109 to 113.
266. In my judgment, therefore, this court is precluded by Community law from applying the restraint of trade doctrine to the extent I have decided it would otherwise be applicable.
THE ISSUES: CONCLUSIONS
267. Addressing the Issues set out in Paragraph 6:

1. THE AGREEMENT

(1) PARTIES

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

(2) CONSTRUCTION

I have set out my judgment on the questions of construction which I think to be material in paragraphs 54 to 82.

1.2. The prerequisites to renewal by DMA under Clause 10 were:

(i) to endeavour to increase unit sales year on year;

(ii) to have discharged its obligations under the agreement; and

(iii) to maintain a sales level of not less than 5000 units per annum.

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

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

(3) SCOPE/VARIATION

1.5/6. I do not think the Agreement as a matter of construction concerned power chairs: paragraph 54. Nor do I think the Agreement was "varied by conduct" to achieve such a result nor that Pihsiang is estopped from denying that it applied to power chairs. I accept that power chairs were in fact supplied by Pihsiang to DMA in the same manner and on the same commercial terms as scooters. But when the question of exclusivity arose expressly it was, to put it at its best for DMA, "ducked": paragraph 88. I do not think DMA can establish in those circumstances that the subsequent course of dealing was referable to an acceptance or representation by Pihsiang that the exclusivity provisions of the Agreement were applicable. DMA knew Pihsiang required to be paid for that.

(4) VALIDITY.

(a) Restraint of Trade

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

No, if, as I think, it was a ten-year Agreement. But, yes, if it was renewable without limit of time: paragraphs 223-4.

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

No, if the Agreement was renewable without limit of time. But yes if it was (contrary to my judgment) subject to the doctrine but a ten-year Agreement: paragraph 226.

1.9(a). Severance is not available to DMA to validate the Agreement if it requires to be validated: paragraphs 227-9.

1.9(b). To the extent I have found the Agreement would otherwise infringe the restraint of trade doctrine the court is precluded by Community law from so concluding: paragraphs 258-266.

(b) Article 81

1.10(a) The Agreement did not have as its "object" the prevention, restriction or distortion of competition: paragraphs 232-236.

1.10(b) The Agreement did not have as its "effect" the prevention, restriction or distortion of competition: paragraphs 237-242.

The Agreement did not fall within Article 81(1) nor do I conclude that it probably would have done so at any material time.

1.11 These questions do not arise in view of my answers at 1.10. If they did:

i) The Vertical Agreements Regulation did not apply to exempt the Agreement by reason of Article 5(a) of the Regulation and Clause 10 of the Agreement: paragraphs 248-249.

ii) The relevant product market is the market for scooters and power chairs. The relevant geographic market is European: paragraph 197.

iii) DMA's share of the relevant market was and would probably have remained under 30%: paragraph 180(vi).

iv) The 1983/83 Regulation has no relevance to the issues: paragraphs 254-7.

1.12 The Agreement would not have benefited from an individual exemption or been judged to fulfil the conditions laid down in Article 81(3): paragraphs 251-2.

1.13 No submissions have been made by DMA which would justify the court in severing any of the provisions of the Agreement such as would save the Agreement as severed from being void or unenforceable if it was or had become such: paragraph 249.

2. PERFORMANCE OF THE AGREEMENT

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

Clause 3. DMA increased sales in continental Europe in every one of the five years of the initial term of the Agreement: paragraph 189. DMA also, and substantially, increased its market share in each year: paragraph 211(viii). It follows that DMA did better than most if not all of the competition in a strongly competitive market. That as it seems to me is a quite sufficient test by which to assess the performance of a best endeavours clause. I would add that if Pihsiang had seriously questioned DMA's sales performance in Europe Mr Wu would have made a great deal more of it than he did in particular at the time of renewal. On the few occasions when he did question it he received a sharp response which on the figures was fully justified.

Mr Mill criticised DMA's failure to appoint distributors across Europe. But the main markets were served by Practicomfort and latterly Casacare. Practicomfort itself made cross-border sales to 10 countries according to Mr de Groot. DMA attended international trade shows. There is no evidence to suggest there were other worthwhile markets or that any other company succeeded in exploiting them when DMA did not. The very fact that the largest counterclaim Pihsiang and Mr Bolton can even seek to justify on the basis of any reliable figures is a capital sum of £158,000 over the full five-year term of the Agreement itself demonstrates the insignificance in context of what is alleged. The figures for sales in Belgium, France Italy and Norway used in Pihsiang's closing submissions (paragraph 303) are misleading. They are founded on the wrong (as I have found) sales figures provided by Mr Wu. If the correct sales figures (in Mr Wu's first witness statement) for the year ending 31 January 1996 are used the result is a very different picture even ignoring the fact that in later years Practicomfort made sales to at least some if not all of the countries shown and they are not included in the figures. Pihsiang also relied on criticisms made by Simon Dalton and Mr de Groot of DMA's European marketing efforts but they were in my judgment characterised more by interested exaggeration than substance. The figures are there to be seen. So, too, is the evidence of DMA's persistent search for suitable acquisitions in mainland Europe. The fact that in the event only Casacare was acquired is not evidence of a breach of a "best endeavours" clause in the language of Clause 3:see paragraph 59. The references to DMA's performance under the Agreement in Pihsiang's March 2001 Prospectus also speak for themselves.

Clause 11(ii). Mr Wu made one written request for information about DMA's sub-distributors assuming his reference to "dealers" can fairly be so described (paragraphs 96 and 97). Mr Wu knew, of course, about Practicomfort and Casacare. He did not pursue the request. No loss is even claimed to have been suffered as a consequence of any failure to supply such information. In no ordinary use of the words can this amount to a failure by DMA to discharge its obligations in the context of Clause 10 of the Agreement.

Clause 11(v). I do not think it is permissible for Pihsiang even to advance this case. It was not raised during the currency of the Agreement. It is not pleaded. It is not referred to in any of Pihsiang's witness statements. The court knows nothing about the circumstances in Norway which is the one country in respect of which a failure was suggested to Mr O'Neill in cross-examination. No loss is even alleged.

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

3. RENEWAL

The short point is that DMA was entitled to renew the Agreement under Clause 10 and duly did so. DMA had discharged its obligations under the Agreement and had maintained an annual sales level of not less than 5000 units. DMA also duly paid the $100,000 and Pihsiang duly received both the payment and the fax dated 3 February.

If it had been material I would have rejected DMA's alternative case that the Agreement was renewed by agreement at the presentation on 7/8 February 2001 or by words and conduct thereafter. Essentially DMA believed it had a contractual right to renew. It was right. That is what DMA relied upon as Mr Crowe and Mr O'Neill readily agreed. It did not rely on anything Pihsiang said or did save as confirmation of that right and its exercise. No doubt that was a comfort when dealing with Mr Wu but no more; Pihsiang's subsequent conduct is of course of evidential weight when considering the substance of Pihsiang's complaints about breaches of the Agreement at 6 February 2001 but that in my judgment is as far as it goes and, on my findings, as far as DMA needs it to go.

As for the specific issues:

3.1. There were no relevant breaches.

3.2. DMA was entitled to renew the Agreement on 6 February 2001 and did so.

4 BREACH/REPUDIATION

The Agreement did not terminate on 6 February 2001. It was renewed for a further 5 years. It was repudiated by Pihsiang. The repudiation was validly accepted by DMA by their solicitors' letter dated 26 April 2002: paragraph 145.

5 DMA'S LOSS AND DAMAGE

The key evidence on the amounts recoverable (if they are) by DMA on the claim, for the reasons I have sought to express when summarising the expert evidence, is the evidence of Mr Ellison. His final figures (as I understand them to be) are set out in paragraph 213. The parties are in a position to adjust the figures to reflect my findings should that be necessary (for example as regards the Kymco costs of mitigation) and because of the developing nature of the evidence and the number of imponderables I think it better to leave the parties to see if they can agree the final figures or isolate points of difference rather than myself adopting any particular figure before that final check has been made.

As I find that on its proper construction the Agreement provided only for one renewal ending on 5 February 2006 and that the claim is to be limited to scooters the base figure for the value of the claim is the figure of £10.2m in paragraph 213.

Mr Auld did submit that as a matter of probability had the Agreement continued Pihsiang would also have continued to supply power chairs on an exclusive basis to DMA as it had done before. I can see the force of that. But in my judgment Mr Wu was quite capable of acting apparently irrationally in immediate commercial terms either if he was annoyed or if he saw some chance of thereby achieving a commercial compromise to Pihsiang's advantage. Indeed I think Mr Wu had resolved to break the Agreement in any event and take what consequences might follow from that.

In the event that it be decided that I am wrong in my conclusion and the claim extends to subsequent five-year renewals whilst again I accept Mr Ellison's evidence as the best evidence of the financial outcome over these extended periods, assuming unhindered renewal of the Agreement, in my judgment the discount factor (even if increased every five years) and an assumption of no further growth after 2011 do not sufficiently address all the practical and commercial risks which could have arisen looking so far into the future. In general terms I agree with Mr Mill that I have to assess the chances of the Agreement continuing and earning DMA the sums Mr Ellison calculates. That is at best for DMA what it has lost on this hypothesis. The outcome is speculative. The uncertainties are legion. To state some of them:

(i) Mr Wu (now aged 57) might retire and without him Pihsiang might lose its way in product development in a competitive market;

ii) DMA's venture with Kymco or another manufacturer might be as successful in time as any success it would have achieved with Shoprider;

iii) Mr Wu might have continued to make life difficult for DMA through pricing, selling power chairs to other distributors, or in other ways;

iv) DMA might have failed to discharge its obligations under the Agreement;

v) Other manufacturers, particularly in mainland China, might enter the market with lower costs;

vi) DMA itself might have found renewal to be no longer of commercial interest.

In my judgment these uncertainties are such and sufficiently real that I do not think it is possible to conclude that DMA suffered any measurable loss referable to a right to renew the Agreement beyond 5 February 2016 and only a reducing chance of such discounted loss between 5 February 2006 and 2011 and 2011 and 2016.

There can be no pretence at any scientific or even satisfying calculation but doing the best I can I think a fair reflection of these matters would be to assess DMA's loss at 50% of Mr Ellison's figure (£20.4m less 10.2m) for the period from 5 February 2006 to 2011 and 25% of his figure (£27.5m less 20.4m) for the period from 5 February 2011 to 2016 with the figures themselves adjusted if they need to be to reflect my other findings.

6 PIHSIANG'S LOSS AND DAMAGE

This issue does not arise on my finding that DMA was not in breach of Clause 3 of the Agreement. In any event I consider the now insignificant loss claimed not to have been established. I agree with Mr Ellison: there is no analytical basis on which any loss could properly be or has been shown.

7 INTEREST

Insofar as interest is claimable it should be calculated at the rate of 1% over base rate for the time being.

OVERALL CONCLUSIONS
268. The Agreement is effective as but only as a 10-year agreement expiring on 5 February 2006: paragraphs 70-82.
269. DMA is entitled to claim damages for the breach and repudiation of the Agreement by Pihsiang for the period ending on 5 February 2006. Those damages are to be assessed as set out in my conclusions under Issue 5 (first two paragraphs).
270. If, contrary to (1), the Agreement is to be construed as entitling DMA to renew it at unlimited 5-year intervals then:

i) It would, but for Community law, be unenforceable by reason of the common law doctrine of restraint of trade ;

ii) It would not infringe Community law but only by reason of the application of Article 81(1) itself and not because it was or would have been exempted either by a block or individual exemption;

iii) Community law would apply so as to nullify the effect of the common law resulting in the Agreement being valid and enforceable.

271. In those circumstances DMA would be entitled to damages assessed as set out in my conclusions under Issue 5 (last three paragraphs).
272. Whatever the proper effect of the Agreement Pihsiang's counterclaim fails entirely: conclusion on Issue 6.