England and Wales Patents County Court

IN THE PATENTS COUNTY COURT

		Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		28/03/2013

Judge Birss :

Topic	Paras
Introduction	1
The claim	24
The witnesses	35
Issues to be decided	40
The applicable law	42
The contract terms	43
Mitigation	52
Delivery up	53
Findings of primary fact – the operating failures	64
Apply the law to the facts	70
The first stage – up to "midday" on 14th July 2010	71
The second stage – after the trade mark problem was revealed	75
Head 3 – other losses	85
The sums claimed	89
Interest	94
Conclusion	95

Introduction

1. This is a case about telephones. In 2009 the claimant (Azzurri) entered into a contract with the Automobile Association Limited (the "AA") to supply the AA with a large number of telephones for its call centres in the UK. It was a major, high profile contract. About 1100 handsets were required. They were to be Avaya 2420 handsets. The Avaya 2420 handset was well known to be a robust and reliable product. Azzurri acquired the handsets required from a supplier called Westcon. Westcon is an "Approved Distribution partner" of Avaya. The handsets from Westcon were purchased in April 2009. The AA then ordered a further 1077 Avaya 2420 handsets from Azzurri. Azzurri acquired these handsets from a different supplier, the defendant. Although the defendant company is called International Telecommunications Equipment Ltd, it is known as SOS Communications and it is convenient to refer to the defendant as SOS. Although SOS has in the past been an approved Avaya reseller, at this stage it was not.
2. Discussions between Azzurri and SOS began in an email in October 2009. Azzurri's purchase order to SOS for 1077 Avaya 2420 handsets is dated 26^th October 2009. The price for the handsets is £118,470.00. The SOS invoice for the handsets is dated 18^th November 2009. SOS supplied the handsets to Azzurri in November 2009. The handsets supplied by SOS had been bought by SOS from the third party, Fonesys Communications Inc. (Fonesys) of New York. They were supplied from the United States.
3. Both the Westcon supplied handsets and the SOS supplied handsets were stored together in Azzurri's warehouse.
4. The handsets are not like ordinary domestic telephones. They cannot simply be plugged into a telephone socket. They only work as part of an overall telephone system run by the customer (in this case the AA). At the centre of the system is a server running Avaya's software called Communication Manager (CM) which has call processing capabilities, messaging and call centre functions. To install a handset it needs to be connected into the network and the Avaya firmware is uploaded. To function the handset communicates with the server.
5. The installation of the handsets at the AA started in 2010. Azzurri started delivering the Avaya handsets from its warehouse to the various AA call centres. Over a period from April to July 2010 about a third of the handsets from Azzurri's warehouse had been installed in five AA call centres. By July 2010 all the handsets had been allocated and delivered to the call centres but they had not all been installed on site.
6. The handsets started to be used by AA staff in about April or May. Shortly after the handsets were installed the users started complaining. Azzurri says the problems were unusual and became a cause of concern. Normally Azzurri would expect less than 0.5% of new Avaya handsets to fail within the 1^st year and, Azzurri says, the problems were much more frequent than this. The problem was described in a later report as "Intermittently users are experiencing phone screens going blank and some call cut off".
7. Investigations were carried out. It was not easy to work out what was wrong. The fault occurred on an intermittent basis. On 10^th June 2010 Azzurri sought the assistance of Avaya to fix the problem. It was still not easy to work out what was wrong. By 15^th June Avaya had agreed with Azzurri to the "escalate" the problem from one tier of Avaya's support specialists to a higher tier. On 16^th June a test bed was set up by Azzurri engineers to try and investigate the problem in a systematic fashion in a controlled environment. This ran for two weeks. By the end of June Azzurri concluded that the problem was most probably linked to the CPU or alternatively the Avaya 2420 handsets themselves. On 30^th June an idea was tried of turning off the maintenance routine in Avaya's CM software. The failures still happened but they were no longer intermittent. Now when a handset failed it did not reset itself. The screen remained blank and could be easily identified. This led to Azzurri identifying that the failing handsets all had a serial number on the casing which began 081636. The first two digits represent the year of manufacture. The second two represent the factory and the last two are the week of manufacture. There is an email on 5^th July 2010 between the individuals involved in the investigation which indicates that by this time the team had "largely determined" that it was handsets with serial number prefix 0816 that had the problem.
8. Azzurri began to audit the stock of handsets and replace handsets with ones which did not have a serial number associated with the problem.
9. From what Azzurri had been able to determine the relevant handsets were all or mostly the ones from SOS. At this stage (5^th July) the manufacturer, Avaya, was indicating that it was going to issue a Product Correction Notice (PCN) covering Avaya 2420 handsets with the serial number prefix 0816. A PCN is a global notice that Avaya would issue to the whole of its reseller/distributor base.
10. On 6^th July six SOS handsets with the 081636 serial numbers were sent to Avaya for testing. This was part of Avaya's standard process for issuing a PCN notice.
11. 0n 8^th July Neil Berwick of SOS sent an email to Azzurri which set out the serial numbers for the handsets SOS had supplied to Azzurri. The vast majority have the prefix 081636.
12. On 14^th July 2010 an email from Ian Cashmore of Azzurri to Nigel Powell of Avaya records a discussion between them about the problem. Avaya will be seeking to recall all 0816 handsets. From the total number of 2177 handsets for the AA project, about 900 have 0816 serial numbers and Azzurri's team are working to locate and remove them back from the AA's sites to Azzurri. The email states that so far 627 have been found and of those 505 came from SOS and 82 came from Westcon. Mr Cashmore asks for Avaya's confirmation that it will acknowledge there has been a product manufacturing defect and for Avaya's assistance in returning and replacing/repairing all 900 handsets.
13. At this point therefore, from Azzurri's point of view, the problem was due to faulty Avaya goods which the manufacturer, Avaya, was sorting out. It was normal practice for an authorised reseller like Azzurri to deal directly with Avaya for support problems rather than deal with the distributor SOS.
14. However 14^th July 2010 was also the day the complexion of the problem changed.
15. Also on that day some initial results of Avaya's testing on the handsets emerged. An internal Avaya email, forwarded to Azzurri, states that the external serial numbers printed on the handsets did not match the serial number which was electronically stored on the circuit boards inside. One consequence of this mismatch was that whereas up to that point Azzurri had been using the serial numbers generated by the CM system to identify handsets which were thought to be the faulty kind, these electronically generated serial numbers could not be safely reconciled with the list of serial numbers provided by SOS, since that list was based on the external serial numbers on the handsets. Azzurri says that although the email of 14^th July from Ian Cashmore to Nigel Powell attributes 82 of the relevant handsets to Westcon, that attribution was caused by the mismatch and in fact all relevant handsets came from SOS.
16. However a much more significant element arising from Avaya's testing reported on 14^th July was that the mismatch of the serial numbers indicated to Avaya that the handsets were either refurbished or as they put it "grey market" products. At this point Avaya's attitude changed dramatically. On 15^th July Mr Powell emailed Mr Cashmore. Mr Powell states that the first pass tests indicate that the handsets are "either refurbished or grey market (counterfeit)" and that if this is confirmed then Avaya will not support the products in any way. He suggests Azzurri seek recompense from SOS, which was not an Avaya "Approved Distribution partner", and points out that Avaya has spent weeks tracking a handset fault that may not be one of Avaya's making. He points out that replacement sets are available for purchase from Westcon and states that "Given the gravity of the situation the Avaya UK leadership and legal teams have been briefed and are acting accordingly against the supplier of these handsets."
17. There is an email from Liz Barford at SOS to Angela Goodey at Azzurri on 14^th July at 15:12. It is not clear exactly where this fits into the chronology on that day but it does not matter. In the email Ms Barford states that SOS is aware there has been a problem with the handsets. The email states that before SOS can progress the issue they need a return of 10 sample faulty phones, some technical details and any Avaya testing report. The email indicates that if it is necessary to repair the phones SOS will do so without hesitation as a warranty repair.
18. On 15^th July Mr Cashmore replies to Ms Barford at SOS. The email states that the handsets supplied by SOS have a fault and that Azzurri regard the whole supply as "not fit for purpose". The email seeks from SOS support to allow Azzurri to return all the 1077 handset and obtain a full refund and to obtain recompense for the additional cost of purchasing replacement items through Avaya's approved distributor Westcon and the time and effort spent investigating the problem and the time spent removing the installed handsets. Mr Cashmore points out that Avaya are not going to issue a PCN, do not recognise SOS as an approved distributor and are threatening to seek recompense for the time spent investigating the problem since the root cause is associated with the supply of "grey market" stock from SOS.
19. Mr Hepher of SOS replied to Mr Cashmore the same day. He repeats the offer to carry out a warranty repair, states that "as agreed we will await delivery of sample phones for testing" and asks for copies of the relevant documents and information. (I do not accept there was in fact any agreement about samples but the point is not important.) A later email from SOS to Mr Cashmore (20^th July) expresses SOS's concern that a problem which had begun some months earlier had not been brought to its attention until July.
20. Azzurri decided to replace all the SOS handsets at the AA's sites with replacement handsets to be obtained from an authorised Avaya distributor (Westcon). An initial order of 250 handsets from Westcon was placed on 16^th July (£47,500), with a further order in July (£47,500) and a final order in August 2010 (£104,679) making a total of 1077. Westcon supplied the replacement handsets in August-September 2010. Azzurri paid Westcon £199,679.34 in total.
21. From July to September 2010 all the SOS handsets were identified and boxed up ready to be collected. The problem caused by the mismatch between external and internal serial numbers meant that a barcode reader (Mallabourn I paragraph 125) was used to scan the external serial numbers on the handsets in order to identify them.
22. On 17^th August 2010 Avaya's solicitors Taylor Wessing wrote to Azzurri. The letter is headed "Counterfeit Avaya 2420 Digital Telephone Units" and asserts that the handsets are counterfeit. It states that Azzurri has infringed Avaya's trade marks and states that Avaya will be entitled to pursue a claim against Azzurri in relation to "Infringing Products". These are defined in the letter as both counterfeit goods and any other unauthorised Avaya goods which were imported into the European Economic Area without Avaya's express consent. The letter seeks conventional relief including an undertaking not to infringe in future, delivery up of all Infringing Products and information about the dealings in Infringing Products to date. A deadline of 31^st August is set. In later discussions and correspondence Avaya made clear its insistence to Azzurri that all the SOS handsets should be delivered up to Avaya and not returned to SOS. Avaya settled the claim with Azzurri and on 19^th November 2010 Azzurri delivered up 1059 SOS handsets to Avaya.
23. Over the summer Avaya's solicitors also wrote to SOS. This led to a settlement agreement between Avaya and SOS signed by SOS on 28^th October 2010. The agreement has various terms including SOS agreeing not to deal in "Infringing Products" (defined in the same way as in the 17^th August letter above) and paying a sum to Avaya.

The claim

24. On 12^th October 2010 Azzurri's solicitors wrote to SOS and set out a claim for breach of contract and misrepresentation. The sums claimed were:

1) A sum as repayment of the sum already paid to SOS for the handsets. The amount now sought under this head is £118,470.00.

2) The additional costs of obtaining replacement handsets from Westcon. The amount actually paid to Westcon was £196,502.34. The additional costs now sought under this head are therefore £78,032.34.

3) A sum representing management and investigation costs to deal with the breach and misrepresentation. The amount was unspecified. The amount now sought under this head is £93,206.14.

25. Correspondence ensued and parties could not agree. In January 2011 the claimant's solicitors sent to the defendant's solicitors a copy of a witness statement of an Avaya employee, Koldo Loidi. This rehearsed what had happened from Avaya's point of view. In it Mr Loidi states his opinion that the handsets were counterfeit, although he does not wish to reveal the detailed basis for that opinion, but that in any event since they were sourced by SOS from Fonesys in the USA and Avaya had not given its consent to the import into the EEA, the goods were unauthorised parallel imports and an infringement of Avaya's trade marks.
26. On 25 July 2011 proceedings were issued in the Queen's Bench Division, Birmingham District Registry. The Particulars of Claim pleaded a case of breach of the terms implied in the contract by the Sale of Goods Act 1979. Broadly the allegations were that the goods sold were faulty and that the import of the goods into the EEA was an infringement of the Avaya trade marks. The Particulars did not assert that the handsets were counterfeit. The losses claimed were the same three heads of loss referred to in the letter before action.
27. In its Defence SOS admitted the contract although there is a point of detail in relation to Sale of Goods Act terms. The allegations about faulty handsets were denied: SOS did not accept the faults were as serious as Azzurri contends, after all, no complaints about the handsets were communicated to SOS until about 14^th July, SOS's request for a sample of a faulty handset was ignored and no sample was ever produced. SOS's position was that even if there was a fault with some handsets, there is no evidence it was widespread across the 1077 SOS handsets. On the issue of trade mark infringement, SOS contended that the goods were genuine Avaya goods imported on the "grey market" from the USA. It denied they are counterfeits. It also denies that Azzurri were obliged to deliver up the handsets to Avaya.
28. SOS issued a third party claim against Fonesys and served it (with permission) in the USA. Fonesys did not respond. SOS sought default judgment against Fonesys but this was refused because the claim is an additional claim not a counterclaim and CPR r20.3(3) disapplies Part 12 (default judgment) for such claims. Instead r20.11 means that if the third party does not acknowledge service or defend, they are deemed to admit the claim and are bound by the judgment in the main proceedings.
29. Given that the case involved issues of trade mark law, albeit in an action for breach of contract, in March 2012 the parties agreed to transfer the proceedings to the Patents County Court. In July 2012 I heard the case management conference. One of the elements of the Patents County Court CMC procedure is to identify and review the issues. This process bore fruit in the present case because it was unclear whether the question of whether the goods were or were not counterfeit was even in issue. It was not pleaded in the Particulars of Claim but the claimant was suggesting in a draft list of issues that it was in issue. There was no serious challenge to the point that the import of the goods into the EEA was an infringement of Avaya's trade marks given the approach to consent under EU law (the Zino Davidoff case ECJ (conjoined cases C-414/99 to C-416/99)). However the question of whether the goods were or were not actually counterfeits was highly emotive, potentially costly to try and it was not clear what difference it would make given the position under EU trade mark law. It was also unclear what the claimant's position actually was and unclear how the point could be tried fairly anyway without Avaya as a party. Accordingly I ruled the list of the issues to be decided at trial did not include the counterfeit point. The counterfeit question did not satisfy the cost-benefit test (cf PD 63 paragraph 29.2).
30. The issues identified at the CMC were:

1. Identification of the material provisions of the contract between the parties. This issue shall include, in particular, the scope and effect of the express and implied terms identified in paragraphs 5-7 of the Amended Particulars of Claim.

2. Were there in fact Operating Failures with the Handsets, and if so how widespread and/or severe were such Operating Failures?

3. Did the importation, stocking, offer for sale and/or supply of Handsets by the Defendant to the Claimant amount to infringement of the Avaya trade marks?

4. Was the Claimant obliged to deliver the Handsets to Avaya or did it choose to do so?

5. Has the Defendant breached the contract as alleged in paragraphs 21-22 of the Amended Particulars of Claim?

6. Has the contract been repudiated and if so is the Claimant's election valid?

7. Does the Claimant's purchase of replacement handsets from Weston constitute lawful mitigation of loss?

8. Quantum. This issue shall include

(a) Whether the Claimant is entitled to the full £149,783.30 mentioned under paragraph 26(1) of the Amended Particulars of Claim or, as the Defendant alleges, £118,470;

(b) Whether the Claimant is entitled to the £81 209.34 mentioned under paragraph 26(2) of the Amended Particulars of Claim

(c) Whether the Claimant is entitled to anything under paragraphs 26(3) to 26(5) of the Amended Particulars of Claim and if so what;

(d) Whether the Claimant is entitled to anything under paragraph 27 of the Amended Particulars of Claim and if so what;

(e) interest

9. Is the Defendant entitled to judgment on the Part 20 Claim?

31. Points 8(c) and (d) relate together to the third head of claim as put forward in the 12^th October 2012.
32. The matter proceeded to trial.
33. On 16^th November 2012 in a response to a Part 18 request, the defendant admitted that the supply of the handsets from SOS to Azzurri was an act of infringement of Avaya's UK trade marks and also that the supply of the handsets from Azzurri to the AA was an act of trade mark infringement.
34. At trial Azzurri were represented by Geoffrey Pritchard instructed by Shakespeares Legal LLP and SOS were represented by Douglas Campbell instructed by Healys LLP. Fonesys did not appear.

Witnesses

35. Azzurri's principal witness was David Mallabourn. He has worked in the business at Azzurri and its predecessor company, since 1994. At the relevant time he was Head of Implementation and Support with responsibility for the engineers providing remote and field support as well as the engineers dealing with the implementation and roll out of installations. His evidence covered the whole history of the dispute and addressed the issue of quantum, seeking to give detailed evidence about the work and the time spent by Azzurri staff trying to identify and fix the problem and replace all the SOS handsets.
36. Much of Mr Mallabourn's evidence was based on what others at Azzurri had told him. Although I can sympathise with Azzurri that it was more convenient to pull almost everything together into a witness statement of a single person, it was not always clear how much first hand knowledge Mr Mallabourn had of the matters he was putting forward. He was not seeking to mislead in any way. However I must bear this in mind in placing weight on Mr Mallabourn's evidence.
37. Azzurri also called Jonathan Whitlow. He is Head of Logistics at Azzurri and has been with the business since 1989. His evidence was direct to quantum, to explain what Azzurri logistics staff had to do in order to collect and replace the faulty handsets. His evidence was based on trying to reconstruct what had happened based on what he thought would be logical. I am sure Mr Whitlow was not seeking to mislead but I am not satisfied I can rely on Mr Whitlow.
38. At the start of trial Azzurri also sought to rely on a second witness statement from Avaya's Mr Loidi and from a Victor Avalos of Avaya, both of which were directed to the counterfeit question. Along with sorting out some other issues at the opening of the trial, I refused to permit Azzurri to resurrect this issue or rely on that evidence.
39. SOS called evidence from Colin Hepher. He is a director of SOS. He explained the events from SOS's point of view. He was a straightforward witness.

Issues to be decided

40. The only serious issues of primary fact relate to the operating failures (issue 2) and to the third head of damage (issues 8(c) and (d)). There is not now a dispute on issue (3). All the other issues are either questions of law or the application of the law.
41. A point which is at the heart of the dispute is the following. SOS says that what should have happened is that Azzurri should have returned the handsets to SOS and SOS would have replaced them all with non-infringing handsets free of charge. If that had happened Azzurri would not have a claim to refund the purchase price and would have had no claim to the extra cost of buying replacement genuine handsets from Westcon. Azzurri might still have had a claim under the third head but that depends on the facts and is a fraction of the value of the dispute. A key element in this problem is that since Azzurri delivered up the SOS handsets to Avaya, Azzurri was not in the end in a position to return any of the goods to SOS. Azzurri says it was obliged to deliver up the handsets to Avaya and so it is entitled to a sum equal to the refund and the extra cost of replacement. SOS says Azzurri was not obliged to do so at all. In fact it did so by choice in order to retain its status with Avaya. SOS should not suffer as a result of that choice.

The applicable law

42. The framework of contract law which applies in this case needs to be considered. There is also a point on delivery up. I will address separately any law relating to the quantum of loss below.

The contract terms

43. The Sale of Goods Act 1979 (as amended) applies to the contract in this case. By s12(1) there is an implied term in such a contract that the seller has the right to sell the goods. By s12(2)(b) there is an implied term that the buyer will enjoy quiet possession of the goods. By s12(5A) the term in s12(1) is a condition while the term in s12(2)(b) is a warranty. These terms are agreed to form part of the contract.
44. If the contract is for the sale of goods by description than by s13(1) there is an implied term (a condition) that the goods will correspond to the description. Azzurri said the relevant description was Avaya 2420 handsets. This is also agreed.
45. By s14(2) where the seller sells goods in the course of business there is an implied term that the goods supplied under the contract are of satisfactory quality. This is agreed.
46. By s14(2B)(c) the quality of goods includes their state and condition and in appropriate cases an aspects of the quality of goods is freedom from minor defects. SOS do not accept that this is an appropriate case in which to imply a term about freedom from minor defects.
47. By s14(3) when the seller sells goods in the course of business and the buyer expressly or by implication makes known to the buyer any particular purpose of which the goods are being bought, there is an implied term that the goods supplied are reasonably fit for that purpose. Azzurri say SOS knew the handsets were for AA call centres. This is admitted.
48. The question of how the term implied by s12(1) (seller's right to sell) interacts with a case in which the goods sold infringed a third party's trade mark or patent rights has been addressed in Niblett v Confectioner's Materials [1921] 3 KB 387 (CA) and Microbeads v Vinehurst [1976] RPC 19 (CA). These cases were summarised by Teare J in Great Elephant v Trafigura [2012] EWHC 1745 at paragraphs 93-95 as follows:

93. The two cases which govern the interpretation of section 12(1) of the Sale of Goods Act 1979 concern third parties with trade mark or patent rights in respect of goods which are the subject of sale. In Niblett Ltd. v Confectioners' Materials Co. Ltd. the seller had agreed to sell a quantity of condensed milk; payment was to be made cash against documents. The buyers received the documents and paid the price. The goods arrived bearing a name which was an infringement of a trade mark of certain manufacturers of condensed milk at whose instance the Commissioners of Customs and Excise detained the goods. The buyers were obliged to remove the name in order to get possession of the goods and could only sell them at a loss. In the Court of Appeal Scrutton LJ said that several difficult questions had been argued and that if it had been necessary to decide them all he would have required further time to consider them. He was, however, able to agree with the other two members of the court with regard to section 12(1) of the Sale of Goods Act 1893. The reasoning of the court on this issue is perhaps most fully expressed by Atkin LJ at 401-403. The "right to sell" does not mean simply the ability to pass property in the goods. It is to be understood in a wider sense. Where a third party with a title superior to that of the seller is able to obtain an injunction restraining the sale of the goods, so that the possession of the buyer is disturbed, the seller has no "right to sell the goods"; see also Scrutton LJ at p.398 and Bankes LJ at pp.394-5.

94. In Microbeads AG v Vinehurst Road Markings Ltd. an English company bought machines from a Swiss company. When sued for the price the English company alleged that there had been a breach of section 12(1) of the Sale of Goods Act 1893 because the machines infringed a patent. That defence failed because the machines had been sold and delivered between January and April 1970 and it was only after November 1970 that the holder of the patent became entitled to institute proceedings for infringement of the patent. Thus there was no breach of section 12(1). In the course of his judgment Lord Denning observed at p.222:

"The words "right to sell the goods" mean not only a right to pass the property in the machines to the buyer, but also a right to confer on the buyer the undisturbed possession of the goods; see Niblett Ltd. v Confectioners' Materials Co.Ltd. [1921] 3 KB 387, 42 by Atkin LJ. "

95 Roskill LJ said: at p.225

"As this court said in Niblett's case [1921] 3 KB 387, subsection (1) covers, inter alia, the position where some third party is entitled as of right to stop the same, so that the intending seller cannot transfer a good title to his intending buyer."

49. On this basis it is accepted by SOS that there has been a breach of the term in s12(1).
50. The claimant submitted that since the term in s12(1) is defined as a condition, breach of that term may give the buyer a right to treat the contract as repudiated, reject the goods and recover the money paid for the goods. The right to reject can be lost but if there has been what can be characterised as a total failure of consideration, the buyer can recover the money paid. The claimant does seek to contend that this is one way of analysing what happened and I will consider how this law applies to the case below. At this stage I can state that the defendant does not dispute this summary of the law. However the defendant points out that on this analysis, assuming the claimant was entitled to reject the goods, at the point of rejection the goods become the property of the buyer and the buyer is no longer entitled to deal in them. The defendant says the buyer (Azzurri) was not therefore entitled to choose to hand the goods over to Avaya.
51. Although in the Microbeads case there was found to be no breach of s12(1) because at the date of the sale the sellers did have a right to sell because the patent only came into effect at a later date, this did not mean there was no breach of the warranty in s12(2) (quiet possession). The infringement of the patent meant that there was a breach of the warranty of quiet possession. On this basis SOS also accept that there has been a breach of the warranty in s12(2). However SOS points out that since s12(2) is a warranty and not a condition, breach of s12(2) does not give the buyer a right to reject the goods and recover the money paid, it only gives a right to sue for damages.

Mitigation

52. A point arose on mitigation. Azzurri submitted that the principles applicable were those summarised in Benjamin's Sale of Goods (8^th Ed) paragraph 16-052. The claimant cannot recover for loss caused by the defendant's breach of contract where the claimant could have avoided or minimised the loss. The onus is on the defendant, who must show that the claimant ought, as a reasonable man, to have taken certain steps to mitigate his loss. But since the defendant is a wrongdoer, in breach of his contractual obligation, the standard imposed on the claimant is not a high one. The claimant is not under any obligation to do anything other than in the ordinary course of business nor to take a step which might endanger his commercial reputation. SOS did not disagree with these principles.

Delivery up

53. SOS submits that Azzurri was not obliged as a matter of trade mark law to deliver up the SOS handsets to Avaya. Azzurri submits that it was. SOS refers to what happened in the Niblett case. In that case the goods were tins of condensed milk. The goods arrived in London bearing a name which infringed a trade mark. The goods were seized at Customs and the buyers were obliged to remove the name in order to get possessions. They could only sell them at a loss without any distinctive trade mark. The claim was for breach of warranty seeking damages for the loss. By analogy with the facts of Niblett, SOS contends that the handsets could have been sold had the Avaya name been obliterated. That would bring the trade mark infringement to an end and the goods could have been sold lawfully in the UK. SOS contends a court would not have ordered delivery up of these goods.
54. This argument highlights a difference between a trade mark case like Niblett and a patent case like Microbeads. The facts of Niblett emphasise the limits of a trade mark proprietor's rights. The proprietor did not have the right to stop the trader from dealing in the tins of condensed milk per se, the right was only to prevent infringement of the trade mark. In a patent case like Microbeads however, the patent monopoly would (assuming it was a product patent) make mere possession of the infringing goods unlawful.
55. However although possession of an item which, speaking loosely, infringes a trade mark, is not an act of trade mark infringement, a remedy available to the proprietor of a trade mark is an order for delivery up. In English law delivery up has traditionally been regarded as an equitable remedy available in aid of an injunction. In the sphere of trade marks it is catered for by provisions of the Trade Marks Act 1994. Neither side submitted it was necessary to consider whether and to what extent the equitable remedy would be treated any differently.
56. The IP Enforcement Directive (2004/48) also has a bearing on delivery up. At Art 10 (1) Corrective Measures provides for measures to be taken with regards to goods found to be infringing including (a) recall from the channels of trade, (b) definitive removal from the channels of trade or (c) destruction. By Art 10(2) these measures are to be at the expense of the infringer unless there are reasons not to do so.
57. Section 16 of the Trade Marks Act 1994 provides as follows:

16 Order for delivery up of infringing goods, material or articles.

(1) The proprietor of a registered trade mark may apply to the court for an order for the delivery up to him, or such other person as the court may direct, of any infringing goods, material or articles which a person has in his possession, custody or control in the course of a business.

(2) An application shall not be made after the end of the period specified in section 18 (period after which remedy of delivery up not available); and no order shall be made unless the court also makes, or it appears to the court that there are grounds for making, an order under section 19 (order as to disposal of infringing goods, &c.).

(3) A person to whom any infringing goods, material or articles are delivered up in pursuance of an order under this section shall, if an order under section 19 is not made, retain them pending the making of an order, or the decision not to make an order, under that section.

(4)Nothing in this section affects any other power of the court.

58. "Infringing goods" are defined in s17 as follows:

17 (2) Goods are "infringing goods", in relation to a registered trade mark, if they or their packaging bear a sign identical or similar to that mark and—

(a) the application of the sign to the goods or their packaging was an infringement of the registered trade mark, or

(b) the goods are proposed to be imported into the United Kingdom and the application of the sign in the United Kingdom to them or their packaging would be an infringement of the registered trade mark, or

(c) the sign has otherwise been used in relation to the goods in such a way as to infringe the registered trade mark.

59. Although s16(2) refers to section 18 there is no need to set it out. Section 19 provides:

19 Order as to disposal of infringing goods, material or articles.

(1) Where infringing goods, material or articles have been delivered up in pursuance of an order under section 16, an application may be made to the court—

(a) for an order that they be destroyed or forfeited to such person as the court may think fit, or

(b) for a decision that no such order should be made.

(2) In considering what order (if any) should be made, the court shall consider whether other remedies available in an action for infringement of the registered trade mark would be adequate to compensate the proprietor and any licensee and protect their interests.

[ … ]

(5) If the court decides that no order should be made under this section, the person in whose possession, custody or control the goods, material or articles were before being delivered up is entitled to their return.

[ … ]

60. The effect of s16 is that if the goods are "infringing goods" as defined in s17(2) then s16 is engaged. As the authors of Kerly (15^th Ed. Para 20-117) point out, while the goods to be delivered up must be "infringing", the section does not require that the person against whom the order is sought must have infringed within the meaning of s10 of the Trade Marks Act 1994. Thus an order can be made against a person who is merely keeping infringing goods.
61. Counsel were not able to find any authority which addressed the scope of s17(2). I do not see how s17(2)(a) can apply in this case since regardless of whether the goods are counterfeit or just unlawful parallel imports, the application of the sign "Avaya" took place abroad and did not infringe the (UK or EU) registered trade marks. Equally 17(2)(b) does not seem to apply since the goods are not proposed to be imported into the United Kingdom, they have been imported. However it seems to me that s17(2)(c) does cover this case since it is admitted that the acts of sale from SOS to Azzurri and by Azzurri to the AA were acts of trade mark infringement. The sub-section is drafted using the words "has … been" and is therefore looking to the past. This is consistent with the concept that a keeper of infringing goods, such as someone who has bought them in circumstances in which the sale was an act of infringement, can be made subject to an order for delivery up.
62. Neither side addressed any argument about s16(2) and section 19. By s16(2), the court will only make an order for delivery up if it also makes an order for disposal under s19 or if it appears to the court that there are grounds for making an order under section 19. These provisions came up in Miller Brewing v The Mersey Docks [2003] FSR 5 before Neuberger J but not in a way which sheds light on the issues before me. Sub-section 19(2) provides that when deciding whether to make an order for disposal (and what order if any to make) the other remedies available are considered to see if they would be adequate to compensate and protect the relevant interests. Section 19(5) provides that if no order for disposal is made, the goods have to be returned.
63. The foregoing is a sufficient summary of the applicable law in relation to delivery up in a trade mark case. That is because in my judgment it is neither necessary nor appropriate, in order to decide this case, to rule on whether a court would or would not have ordered Azzurri to deliver up the goods. In a case in which infringement of the trade mark is established (or as here admitted), the context in which this problem arises is and is only one of mitigation. The buyer of the goods was threatened with proceedings for trade mark infringement and compromised that claim by, amongst other things, delivering up the goods to the trade mark owner. The correct question must be whether or not that was reasonable mitigation.

Findings of primary fact – the operating failures

64. SOS feels that the nature, extent and significance of the problems with the handsets have never been satisfactorily proved by Azzurri and it is true that Azzurri has not been forthcoming in producing concrete evidence about the failures before and during these proceedings. SOS has never been given the means to check the handsets for itself.
65. Mr Campbell cross-examined Mr Mallabourn in considerable detail about the failures. The cross-examination did expose what I have mentioned above, that the basis for some of Mr Mallabourn's evidence is not especially solid. Points were put that the number of complaints recorded in a spreadsheet was low, that the staff at the call centres had found a way to work around the problem and possibly recover a call, and that there was evidence in the documents of handsets with numbers other than 0816 associated with the fault.
66. However taking the evidence as a whole, and in particular the internal Azzurri documents which have been produced as well as Mr Mallabourn's testimony, it is manifest that there were problems with the 2420 handsets supplied by SOS. A formal Interim Incident Report was prepared by Joanne Ballard of Azzurri for the senior management at the AA (the IT Director and Telecoms Manager). It seems to be dated 9^th July 2010, just before Avaya discovered that the handsets were at least unlawful parallel imports.
67. The report states that the problems began on 17^th May 2010. I have referred to the way the fault is described in this report in paragraph 6 above. The report states that a decision has been made to remove all the handsets with the serial number 0816 from the AA estate. The report also states that some 0816 handsets in the test bed did not fail. Mr Mallabourn's evidence was that the statement that some 0816 handsets did not fail on the test bed was not correct and he referred to later tests. I have no reason to doubt that the statement was true as at the date it was written. Whether it was later proved to be incorrect does not matter. Assuming the statement was believed to be true when it was written, it is notable that nevertheless the report records a decision to remove all 0816 handsets from operation.
68. I draw the following inferences, based on the report and on the evidence as a whole:

a) Some of the handsets installed by Azzurri at the AA had a fault.

b) The nature and extent of the fault was sufficiently serious to merit escalation within Avaya from one tier of technical support to the highest tier of technical support

c) The nature and extent of the fault was sufficiently serious to merit a formal report from Azzurri to senior management at the AA.

d) The fault was to a significant extent related to the handset. Even if there was a contributing factor from other sources in the system such as the server and software, the major problem was the handset.

e) The fault may not have been unique to handsets with an 0816 serial number but it was associated to a significant extent with those handsets.

f) It is not possible to say whether every handset with an 0816 number was faulty. However the seriousness of the fault and the strength of its association with 0816 handsets was sufficient for Avaya to seriously contemplate recalling all 0816 handsets and issuing a PCN notice.

g) Now that the SOS handsets have been replaced at the AA, the problem has ceased.

h) Either all or very substantially all of the faulty handsets came from SOS.

69. I reject SOS's argument that anything relevant can be inferred from the fact that Azzurri did not contact SOS about the problem until July. The reason was that until Avaya's attitude changed, there was no reason for Azzurri contact SOS or to do anything other than deal with the manufacturer, Avaya.

Apply the law to the facts

70. In order to analyse the issues of liability in this case I will first consider the parties respective positions just prior to the moment Avaya raised the question of trade mark infringement, and then secondly I will consider the position after that. I will refer to the moment things changed and the trade mark issue arose as midday on 14^th July. Whether it was really midday I do not know and it does not matter.

The first stage – up to "midday" on 14^th July 2010

71. Until midday on the 14^th July, the only breach could have related to faulty goods. No breach of the condition in s12(1) (seller's right to sell) was apparent nor was there any breach of the warranty in 12(2) (quiet possession). Some of the goods were faulty. In my judgment it is plain some handsets supplied by SOS were not of a satisfactory quality (s14(2)) and were not fit for the purpose of being used in AA call centres (s14(3)). SOS was in breach of those terms. It does not matter whether the term about freedom from minor defects was applicable.
72. At this stage SOS would have been liable for damages for breach of those terms. Notably however although the terms implied in s14(2) and 14(3) are conditions (s14(6)) Azzurri does not suggest that the breach at this stage gave Azzurri the right to treat the entire contract as repudiated or a right to reject the entire 1077 handsets. I think Azzurri is right in that respect. As at midday 14^th July 2010, the scale of actual defects in the handsets was by no means clear. Avaya was going to recall the entire run of 0816 handsets not necessarily because all of them were faulty, but because from Avaya's point of view as a manufacturer, it was commercially sensible to take that approach. Some 0816 handsets were faulty and enough appeared to be faulty to justify recall of the whole batch.
73. At this stage Azzurri was not looking to SOS for a remedy at all. Azzurri reasonably thought that a better remedy was available from Avaya and that the problem was Avaya's responsibility. In my judgment, as a matter of contract law, Azzurri's contractual rights at this point would have entitled it to damages for breach of contract against SOS but in order to make that good one would have actually had to investigate more carefully which handsets were actually faulty. At this stage the realistic approach, had Azzurri wished to and raised the problem with SOS, was that no doubt SOS would have accepted a return of the faulty handsets and would have replaced the faulty ones at no cost. Perhaps a reasonable approach would have been for all the 0816 handsets to be returned at SOS's cost but matters never got that far.
74. A related point is this. Until midday on 14^th July Azzurri was investigating this problem in a particular way on the footing that it was a manufacturing defect. Avaya were helping solve the problem. Azzurri approached the problem in a particular way on that basis. If from the outset Azzurri had known that Avaya were not going to help, then Azzurri might well have dealt with SOS at a much earlier stage and the way in which the problem was investigated might have been different. That alternative approach might have involved SOS and might have involved a closer focus on exactly how many handsets were faulty, rather condemning the entire batch with 0816 serial numbers. However in my judgment what Azzurri in fact did up to midday on 14^th July was reasonable.

The second stage, after the trade mark problem was revealed

75. The trade mark infringement problem was revealed in the messages from Avaya on 14^th July. The problem applies to the entire consignment of handsets purchased from SOS. At this stage therefore SOS were revealed to have been in breach of the term implied by s12(1) (seller's right to sell) when they sold the goods to Azzurri and were now also in breach of the term implied by s12(2) (warranty of quiet possession).
76. Mr Pritchard sought to suggest that the message from Mr Cashmore to Liz Barford of SOS on 15^th July amounted to an acceptance of SOS's repudiatory breach of s12(1) condition and a rejection of all the goods. I do not accept that interpretation of the email. The message was simply an attempt to open discussions between Azzurri and SOS. A number of points were to be discussed, including return of the goods, a refund and the question of whether the whole stock was "not fit for purpose". But the message was not unequivocal in any respect.
77. The next important step was that Azzurri ordered new Avaya handsets from Westcon. The total price paid (based on the figures given in Mr Pritchard's post trial note) was £196,502.34. SOS argues that it was not reasonable for Azzurri to buy all these phones from Westcon because SOS could have and would have supplied handsets to Azzurri instead. I reject that submission. If the problem had only been concerned with faulty handsets then the position would have been very different. I doubt it would have been reasonable for Azzurri to treat the entire batch of 1077 handsets as faulty and just go and buy another 1077 handsets from someone else. However that is not what happened. The trade mark infringement puts the matter in a completely different light. Given that SOS had caused Azzurri unwittingly to commit an (admitted) act of trade mark infringement by selling the handsets to the AA, it was entirely reasonable for Azzurri to decide to replace all those handsets from a different supplier. There is no basis to say that the price charged by Westcon in those circumstances was unreasonable.
78. The next significant step was the letter before action from Avaya's solicitors on 17^th August. This led to the settlement between Azzurri and Avaya whereby Azzurri delivered up the SOS handsets to Avaya. As I have said above, the relevant question is not whether a court would have ordered delivery up, the question is whether, in the circumstances as they were, the Azzurri's agreement to deliver up in settlement of Avaya's claim was reasonable from the point of view of mitigation of loss.
79. Since infringement is admitted before me, Avaya's assertion of its claim for trade mark infringement was well founded. In my judgment its demand for delivery up of the goods was a reasonable one. From Azzurri's point of view, the trade mark owner had a properly arguable claim for the remedy of delivery up. Mr Campbell submits that the name Avaya could simply have been obliterated from the handsets and that would have rendered the goods non-infringing. That submission is not precisely correct. The handsets were "infringing goods" within the terms of s16 and s17. Obliterating the name on the handset does not mean the goods fall outside the definition of "infringing goods". The obliteration point could have been something to put to the court on an application for delivery up, so as to argue that no order for destruction or forfeiture should be made under s19 but instead an order for erasure under s15 of the Trade Marks Act 1994 could be made. I am not at all satisfied that an order for erasure would have been made instead of an order for destruction or forfeiture but it does not matter. What matters is that the trade mark owner had a properly arguable claim for the remedy of delivery up and I think the person keeping the infringing goods, Azzurri, acted reasonably in compromising that claim including an agreement to deliver up the goods. It may well be that one of Azzurri's motives in reaching that agreement was its commercial reputation with Avaya. Taking that into account does not undermine the reasonableness of Azzurri's actions.
80. I find that agreeing to deliver up the handsets to Avaya was reasonable and was not a failure to mitigate by Azzurri.
81. Finally, Mr Pritchard submitted that the letter of 12^th October 2012 from Azzurri's solicitors to SOS was another occasion on which Azzurri purported to accept a repudiatory breach of the s12(1) condition and rejected the goods. The letter does indeed state that "all the goods are rejected". However by now Avaya was threatening Azzurri with proceedings for trade mark infringement, was demanding delivery up of the goods from Azzurri and was demanding that Azzurri should not give the handsets to SOS. If Azzurri did successfully reject the goods then property in them would have passed back to SOS. That would be inconsistent with the position on delivery up and the fact that Azzurri knew that Avaya did not want Azzurri to return the goods to SOS. I do not accept that the 12^th October letter was capable of being or was in fact operative to accept the repudiatory breach by SOS.
82. A number of the difficulties in this case have been caused by Azzurri's approach to the problem. First Azzurri repeatedly refer to the faults in the handsets. While I have accepted that there were indeed faults, there is some justice in SOS's complaint that the actual extent of the faults has never been made clear. If faulty phones was the only basis for this claim, that would not justify recouping the cost of replacing the entire 1077 handsets from Westcon. Second, Azzurri has repeatedly purported to reject the goods while also having delivered them up to Avaya. It has done so in order to bolster its case for financial compensation but on the facts its claim analysed simply as damages for breach of contract produces the same result as it would do if analysed as a claim for a refund plus damages for the excess paid to Westcon. I prefer to analyse the damage in this case as damages and not as a refund. It seems to me that given the delivery up of the handsets to Avaya, this is a fairer and more realistic legal analysis of the case.
83. The principal loss to Azzurri caused by the breach of s12(1) term (seller's right to sell) and the s12(2) warranty of quiet possession is the cost to Azzurri of buying replacement phones. That is to say the full cost and not just the difference between the total sum paid to Westcon and the price paid to SOS. I can see that had Azzurri not delivered up the stock of handsets to Avaya, then it would only be reasonable for Azzurri to claim the full cost of the replacement handsets if at the same time Azzurri returned the SOS handsets to SOS. A failure to return the handsets on those circumstances would be a failure to mitigate. However since I have found that Azzurri's delivery up of the handsets was reasonable, I do not think it would be right to say that Azzurri's loss caused by the breach was only restricted to the difference between the total paid to Westcon and that the price paid to SOS could only be recovered as a refund from SOS on return of the handsets.
84. I find that Azzurri is entitled to the sum paid to Westcon for 1077 replacement phones as damages for breach of either or both of the s12(1) and s12(2) terms. That is £196,502.34. In addition Azzurri is entitled to damages for the other losses caused by the breach provided the requirements of causation and remoteness are satisfied. These are what I have called head 3. I will address that below.

Head 3 – other losses

85. The sums claimed under head 3 are for the time Azzurri's management and employees took to investigate the problem and replace the SOS handsets. The bulk of the claim relates to sums for time spent (£88,807.84). There are also some hotel costs (£153.50) and courier costs (£3,409).
86. To justify its claim based on management and employee time spent, Mr Pritchard referred to Aerospace Publishing v Thames Water [2007] EWCA Civ 3. In that case the court allowed a claim for damages based on the cost of employing certain staff. Wilson LJ addressed staff costs at paragraphs 73 to 87 of his judgment (with which Longmore and Pill LJJ agreed). At paragraph 86, after reviewing the authorities, he said:

86. I consider that the authorities establish the following propositions:

(a) The fact and, if so, the extent of the diversion of staff time have to be properly established and, if in that regard evidence which it would have been reasonable for the claimant to adduce is not adduced, he is at risk of a finding that they have not been established.

(b) The claimant also has to establish that the diversion caused significant disruption to its business.

(c) Even though it may well be that strictly the claim should be cast in terms of a loss of revenue attributable to the diversion of staff time, nevertheless in the ordinary case, and unless the defendant can establish the contrary, it is reasonable for the court to infer from the disruption that, had their time not been thus diverted, staff would have applied it to activities which would, directly or indirectly, have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time.

87. Mr Campbell did not submit that this reasoning did not apply in the present case but he emphasised what the claimant had to establish in sub-paragraphs (a) and (b), and he also emphasised that in (c) the sum being awarded on the Aerospace basis is the cost of employing the person.
88. I accept that Aerospace applies to the claim made by Azzurri in this case and I will bear Mr Campbell's points in mind. Apart from this Aerospace point, there was no other debate before me about causation or remoteness of damage.

The sums claimed

89. The sums are based on the time spent by Azzurri staff in investigating the faults and replacing the handsets together with the smaller sums for Mr Whitlow's logistics team and couriers and a very small sum for hotels. I can deal with those latter points now. While I can see that it is likely that some time was spent by Mr Whitlow's team and some couriers might have been required, I do not accept that Azzurri has proved its case on those points. I am not satisfied that I can rely on Mr Whitlow's evidence about the logistics team or the couriers. As for the point on hotels, I am not satisfied it is made out. The evidence relating to dates when staff stayed at a hotel was not convincing.
90. The figures for sums claimed for time spent by Azzurri staff in investigating the faults and replacing the handsets are in two sets. One set (a) is for Azzurri senior and principal engineers and another set (b) is for Mr Mallabourn together with Allun Williams, Azzurri's technical support manager dealing with Avaya products. The sums are based on the time spent, charged at the rate Azzurri normally charge out these individuals' time to a customer. Detailed schedules and figures were provided. The figures are:

Replacement:

(a) £30,581.83

(b) £18,500

Investigation:

(a) £21,226.01

(b) £18,500

91. In order for the reasoning in Aerospace to apply, the claimant has to establish that the diversion of staff time caused a significant disruption to its business. The evidence of the effect on Azzurri of the work done by its engineers was one of the matters dealt with by Mr Mallabourn. He explains that the AA project overall was one of the biggest deals Azzurri had undertaken at the time. His evidence was that many Azzurri engineers worked above capacity in connection with this and another project (Matalan) which required their attention at the time. This meant Azzurri had no engineers to assist with other projects and that it was necessary in order to meet delivery milestones on other projects for Azzurri to engage subcontractors to undertake such work. He said that many of Azzurri's engineers were working above capacity on the AA and Matalan projects.
92. The disruption to Azzurri caused by the problems in this case were not as severe as the disruption caused in the Aerospace case by the flood which damaged the publisher's archive. But I do not believe the court was there seeking to say that only a catastrophic problem like the flood in Aerospace would be required in order to recover damages on this basis. The point being made in that case is that if the breach can be said to have caused diversion of staff to an extent substantial enough to lead to a significant disruption of the business then it is reasonable to draw the inference of a loss of revenue equal to the cost of employing the staff. If the diversion did not cause significant disruption then there is no basis on which to draw the inference.
93. I am satisfied that the exercise of pulling out the SOS handsets and replacing them with the Westcon handsets can fairly be described as a diversion of staff time which caused a significant disruption to Azzurri's business. It was a complicated task which Azzurri would not normally have had to perform. It had to be and was in fact carried out in a relatively short period. However I am not satisfied that Azzurri has adduced sufficient evidence from which to infer that the investigation of the fault caused sufficient diversion of staff to significantly disrupt Azzurri's business. The fault with the handsets was a significant problem in its way but fault finding and correction are part of the support function which Azzurri's business is set up to handle. The engineers working on the fault no doubt worked hard and were frustrated by not being able to find the fault more quickly, but I am not satisfied that this process disrupted Azzurri's business or interfered with its ability to earn revenue from elsewhere. I accept that the engineers will have spent time on the AA project and as a result not spent time on other projects, but that is not disruptive. It is their normal support function. If Azzurri had sought to claim the cost of the subcontractors Mr Mallabourn mentioned, then that would have been a different matter but that is not the basis on which the claim is put. I do not accept that the claim based on the cost of investigating the fault has been made out on an Aerospace basis. Since that is the only basis on which that claim is put forward, I reject the claim for investigation time.
94. In relation to replacement, I accept the evidence as to the amount of time spent but I do not accept that the correct rate to use is Azzurri's charge out rate. That would be a fair rate to use if Azzurri put forward a positive case that they had actually lost the ability to charge out these individuals time to clients. In other words if Azzurri was seeking to claim and prove the loss directly then the charge out rate would be the right rate, but Azzurri is not seeking to prove the actual loss directly, it is relying on the inference drawn in Aerospace. There the court specifically referred to the cost of employing the relevant staff as being the amount the court will infer is at least equal to the measure of the loss caused. I will do the same. I am not satisfied the correct rate to use should be any higher than that. The evidence was that the cost of employing the staff was half the charge out rate. That applies to both (a) the senior and principal engineers and (b) to Mr Mallabourn and Mr Williams. Thus I find that the loss caused to Azzurri on this basis is £24,550.91 (=£15,290.91 + £9,250).

Interest

95. There was no dispute that Azzurri were entitled to interest nor that the appropriate rate should be the Bank of England base rate plus 1%. The actual calculation will be performed once the parties have been able to read this judgment.

Conclusion

96. I find that SOS should pay Azzurri the cost of buying all the replacement handsets from Westcon, which was £196,502.34, and the cost in terms of staff time of the exercise of replacing the phones, which was £24,550.91. This comes to a total of £221,053.25. An appropriate amount of interest on those sums at 1% over the Bank of England base rate also should be added.