EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lady Paton Lord Hardie Lord Abernethy	[2010] CSIH 87 CA87/10 OPINION OF LORD HARDIE in the cause WHYTE & MACKAY LIMITED Pursuers and Reclaimers; against CAPSTONE INTERNATIONAL INC. Defenders and Respondents: _______

Act: Lord Davidson of Glen Clova Q.C.; J. Brown; McClure Naismith

Alt: Dunlop Q.C.; McBrearty; Brodies LLP

9 November 2010

Introduction

[2] As is narrated in the opinion of the Lord Ordinary dated 30 July 2010, the reclaimers carry on business as distillers of whisky. The respondents carry on business as distributors of alcohol in the United States of America. The parties entered into a Distributorship Agreement dated 3 and 20 December 1993 and 7 January 1994 ("the agreement") in which the reclaimers granted to the respondents the exclusive right to purchase John Barr Scotch Whiskies ("the Brands") in bottles for resale in the domestic market of the United States of America. Clause 2 of the agreement required the respondents to use their best endeavours to maximise sales throughout the United States of America and to promote the Brands as top quality Scotch whiskies. That clause also provided that, unless otherwise agreed in writing, sales targets and promotional programmes for each 12 month period of the agreement would be agreed in advance in writing and the sales target for each subsequent 12 month period would not in any event be less than that for the previous 12 month period.

[3] Clause 4 of the Agreement was in the following terms:

"We [the reclaimers] will not during your appointment appoint any other distributor for the sale of the Brands in the Territory [the United States of America] nor will we sell the Brands directly to customers in the Territory. It is understood, however, that it will not constitute a breach of this Agreement on our part if we sell the Brands to a customer outside the Territory who subsequently imports the Brands into the Territory. Notwithstanding the foregoing we shall be entitled to sell directly to any Duty Free outlet in the Territory."

[4] The reclaimers aver that the distribution and sale of alcohol in the United States of America is an activity which is regulated both by the Federal Government and by individual states; that in order lawfully to distribute and sell alcohol in the United States of America the respondents would require to hold a Federal Basic Import Permit issued by the Federal Alcohol Tax and Trade Bureau ("the TTB"); that they would require certificates of label approvals issued by the TTB for each product; and that they would also require the regulatory permissions applicable to each individual state in which they distributed the product. While the respondents are in agreement about the general regulatory framework they deny that it is necessary for them to have issued in their own name the import permit and certificates of label approvals. They aver that U.S. law permits an importer such as the respondents to conduct operations via third party licensed entities.

[5] Early in 2010 the parties were negotiating about the possibility of the reclaimers purchasing the respondents' business. In the course of these negotiations the reclaimers' advisers were carrying out due diligence in respect of the respondents' business. The reclaimers aver that, in the course of these investigations, they discovered that the respondents did not hold any of the permits, certificates or permissions referred to above. Rather the requisite permissions were held by another company, Emerald Brands Incorporated ("Emerald"). The reclaimers aver that the respondents' failure to obtain the permissions necessary lawfully to discharge their obligations under the agreement, and their purported discharge of these obligations in an unlawful manner, were material breaches of the agreement. The respondents deny these averments. Rather they aver that valid permits, held either by the respondents or by Emerald as a third party licensed entity, existed for all imports arranged with the reclaimers. Emerald and the respondents had been closely associated with each other throughout and, following service of the notice of termination mentioned below, were merged on 12 April 2010. The respondents also aver that at all material times the reclaimers were aware that Emerald was the permit holder for the importation of the reclaimers' products. These averments are denied by the reclaimers.

[6] Clause 3.3(c) of the Agreement provides as follows:

"Either party shall be entitled to terminate this Agreement forthwith by serving notice in writing on the other upon the occurrence of any of the following events:

(c) any material breach of the provisions of this Agreement by the other party (not remedied with (sic) 14 days of notice requiring remedy having been served)."

[7] By letter dated 6 April 2010 the reclaimers served notice upon the respondents in terms of clause 3.3(c) of the agreement requiring the respondents to remedy (and to demonstrate to the reclaimers' complete satisfaction such remedy including by way of obtaining appropriate releases from liability from the TTB and all relevant subject state regulatory authorities) all such material breaches of the agreement within 14 days of the notice. By letter dated 19 April 2010 the respondents' American attorneys replied, denying that the respondents were in breach of the agreement and asserting that they had always performed and continued to perform fully their obligations under the agreement. The letter also explained that a merger had taken place between Emerald and the respondents which would have the effect that any licensing error that previously existed had been fully remedied. By letter dated 23 April 2010 the reclaimers wrote to the respondents observing that the 14 day period for remedy of material breaches had expired and that the respondents had been unable to demonstrate to the reclaimers' satisfaction that the material breaches had been remedied. In particular, appropriate releases from liability from the TTB and all relevant subject state regulatory authorities had not been obtained. Accordingly the reclaimers maintained that they were entitled to terminate the agreement forthwith in terms of clause 3.3(c). They confirmed that the agreement was so terminated with immediate effect.

[8] The reclaimers seek declarator that the agreement was validly terminated by their letter dated 23 April 2010. A second conclusion for payment by the respondents to the reclaimers of an outstanding debt of £239,882.90 has been satisfied as the debt was paid following the hearing before the Lord Ordinary.

[9] In a counterclaim the respondents seek an order ad factum praestandum ordaining and requiring the reclaimers to continue, pending the currency of the current litigation and until valid termination of the agreement, to accept orders from the respondents for the purchase by the respondents from the reclaimers of John Barr Scotch Whiskies in bottles for resale in the United States of America, all in terms of the agreement, and for such an order ad interim in terms of section 47(2) of the Court of Session Act 1988. Failing such an order, the respondents seek payment by the reclaimers to them of the sum of $10,000,000 as damages for the reclaimers' breach of contract.

Decision of Lord Ordinary dated 30 July 2010

[10] On 22 and 23 July 2010 the Lord Ordinary heard an opposed motion on behalf of the respondents seeking an interim order in terms of the first conclusion of the counterclaim. Before the Lord Ordinary it was a matter of agreement that in considering an application under section 47(2) of the Court of Session Act 1988 the Lord Ordinary required to apply the principles set out by the Inner House in Scottish Power Generation Limited v British Energy Generation (UK) Limited 2002 SC 517. These principles are as follows:

"First, the Lord Ordinary has to identify the issues in the action, including the legal basis of the claims with which he is dealing. Secondly, he has to consider whether the party seeking the order has demonstrated a prima facie case that an obligation exists, and that there is a continuing or threatened breach of that obligation which the order will address. Thirdly, he has to avoid significantly innovating on the parties' contractual rights and obligations. Fourthly, he has to consider whether the balance of convenience is such as to justify the making of the interim order, bearing in mind the nature and degree of the harm likely to be suffered on either side by the grant or refusal of the interim order, and the relative strength of the cases put forward by each party." (Paragraph [26]).

The Lord Ordinary records that there was no dispute between the parties with regard to the first two principles. The issue was whether the reclaimers were required to perform their contractual obligations and that depended on whether they had been entitled to terminate the agreement on the basis that the respondents were allegedly in breach of contract. As far as the second principle is concerned, the Lord Ordinary states that it was not disputed before him that the respondents had made out a prima facie case. In view of the averments to the effect that it was lawful for the respondents to conduct operations in the United States of America via third party licensed entities and to the effect that the reclaimers were aware at all material times that Emerald was the permit holder, it is understandable that, for the purposes of the motion, the reclaimers acknowledged that the respondents had a prima facie case.

[11] The third principle to be observed by the Lord Ordinary was that he had to avoid significantly innovating on the parties' contractual rights and obligations. The Lord Ordinary found this to be the most difficult aspect of the case as presented to him. The respondents had incurred a debt of £239,882.90 in respect of whisky supplied by the reclaimers to them. At the date of the hearing before the Lord Ordinary that debt was outstanding. The Lord Ordinary recognised that to grant the interim order sought by the respondents would impose an obligation upon the reclaimers which went beyond what they were obliged to do in terms of their agreement with the respondents and the parties' subsequent trading relationship. In effect, such an order would deprive the reclaimers of the remedy of declining to supply further whisky to the respondents until all outstanding debts had been paid. The Lord Ordinary properly recognised that this would "arguably be an innovation on the rights and remedies available to the parties under the contract." However, he sought to avoid such an innovation by attaching a condition to the order to the effect that the reclaimers were not obliged to accept orders from the respondents until the respondents had made payment of the sum sought in the second conclusion of the summons.

[12] The fourth principle considered by the Lord Ordinary was whether the balance of convenience justified his making the interim order, bearing in mind the nature and degree of the harm likely to be suffered on either side by the grant or refusal of the interim order, and the relative strengths of the cases put forward by each party. He was unable to reach a view about the relative strength of the parties' respective cases but he considered various issues to enable him to determine whether the balance of convenience favoured the granting of the interim order and he concluded that it did. Accordingly on 30 July 2010 the Lord Ordinary pronounced the following interlocutor:

"The Lord Ordinary, having resumed consideration of the opposed motion of the defenders, ad interim grants an order ad factum praestandum in terms of Section 47(2) of the Court of Session Act 1988 that the pursuers continue, pending the currency of the present litigation and until valid determination of the Distributorship Agreement between the parties dated 3^rd December 1993 and 8^th January 1994 (sic), to accept orders from the defenders for the purchase by the defenders from the pursuers of John Barr Scotch Whiskies in bottles for resale in the United States of America, all in terms of said Distributorship Agreement; and decerns; said interim order to become effective and conditional upon the defenders making payment to the pursuers of the sum sought in terms of the Second Conclusion of the Summons as amended; appoints the defenders to lodge a receipt for payment of said sum within 7 days of payment; Suspends the issuing of a certified copy Interlocutor of this order until the lodging of said receipt."

Lord Ordinary's Interlocutor dated 11 August 2010

[13] Following the interlocutor dated 30 July 2010 the respondents became aware that the reclaimers had purported to appoint another distributor for John Barr Scotch Whiskies in the United States of America. Accordingly the respondents sought leave to amend the conclusions of the counterclaim and thereafter sought interim interdict against the reclaimers pending the currency of the present litigation from accepting or fulfilling orders from any person or entity in the United States of America (with the exception of sales directly to any duty free outlet in the United States of America) other than the respondents for the purchase from the reclaimers of John Barr Scotch Whiskies in bottles for resale in the United States of America. The Lord Ordinary heard the motion on 11 August 2010 and granted the interim interdict in the terms sought.

[14] With leave of the Lord Ordinary the reclaimers now seek to reclaim against both of the foregoing interlocutors.

Submissions for the Reclaimers

(a) Interlocutor dated 30 July 2010

[15] While it was accepted that the Lord Ordinary was exercising his discretion in determining the issue before him and that an appellate court will not generally interfere with the exercise of such a discretion except where the Lord Ordinary has exercised it on a wrong principle or where his decision is plainly wrong, it was submitted that the Lord Ordinary had fallen into error in a number of respects. Although it had been conceded before the Lord Ordinary that the averments on behalf of the respondents disclosed a prima facie case (which concession was not withdrawn), the Lord Ordinary had relied upon the trading history between the parties for almost 20 years but had failed to appreciate the significance of the reclaimers' case that such trading had involved unlawful activity on the part of the respondents. The respondents' reaction to the notice in terms of clause 3.3(c) had been to negotiate a merger with Emerald. While this addressed issues of any future illegality, it failed to provide the remedy sought in respect of past illegality. This was a significant error in the context of the Lord Ordinary's assessment of the respective weight of each party's case. In reaching the conclusion that the strength of the respondents' case was (so far as could be measured at this stage) at least as great as that of the reclaimers, the Lord Ordinary was in fundamental error because his assessment had ignored the allegation of illegal trading on the part of the respondents throughout the period of their relationship with the reclaimers. Moreover, the Lord Ordinary had erred in undertaking the balancing exercise required of him, when he observed that, in view of the respondents' exclusive right to purchase John Barr Scotch Whiskies and the terms of clause 4 of the agreement, it would be unlikely that any of the reclaimers' products would be sold and distributed in the United States of America until the conclusion of this litigation. Sale and distribution of the reclaimers' products within the United States of America could be achieved indirectly, as is envisaged in clause 4.

[16] Counsel recognised that the courts in Scotland adopted a different approach to the courts in England to applications for specific performance prior to the final determination of the case (Highland and Universal Properties Limited v Safeway Properties Limited 2000 SC 297; Co-operative Insurance Society Limited v Argyll Stores (Holdings) Limited [1998] AC 1). In Scotland there is a right conferred upon an aggrieved party to an order for specific performance. However, that remedy could be withheld in appropriate cases by the court having equitable jurisdiction in the exercise of its discretion. In contrast, in England no such right existed. Such a remedy was entirely at the discretion of the court in the exercise of its equitable jurisdiction. The difference was conceptual as in both jurisdictions the court was involved in the exercise of its discretion, albeit from a different standpoint. In determining whether to grant or refuse a motion for specific implement prior to the determination of the case the court should take whichever course appears to carry the lower risk of injustice. (Films Rover International Limited and Others v Cannon Film Sales Limited [1987] 1 WLR 670).

[17] It was further submitted that the Lord Ordinary had correctly counselled himself against innovation and had taken steps in that regard as far as the outstanding debt was concerned. The debt had now been paid. However the Lord Ordinary had failed to appreciate that the effect of the order that he was being invited to pronounce would be to compel the reclaimers to ship whisky on demand to the United States of America. Clause 9 of the contract could not require the reclaimers to do so. Rather it envisaged the possibility that the reclaimers would not accept an order from the respondents. Furthermore, it excluded any claim for loss occasioned by the reclaimers' failure to supply the respondents or delay in supplying them with orders which had been accepted. The reclaimers are the producer and the supplier of the product and are the dominant partner. It was entirely appropriate that they should be entitled to withhold supply. There were commercial reasons for such a decision. They may wish to supply to someone else. They may wish to delay accepting an order until such time as the price increased. The contract was silent about minimum and maximum quantities of whisky which the respondents could order from the reclaimers. However, the court was imposing upon the reclaimers an obligation to accept any order submitted by the respondents. That was a significant innovation to the contractual relationship between the parties.

(b) Interlocutor dated 11 August 2010

[18] Counsel submitted that if the interlocutor dated 30 July 2010 were recalled, the interim interdict should also be recalled. Interim interdict is granted periculo petentis. If the respondents were ultimately unsuccessful the scale of damages would be substantial. The respondents were not a substantial company and would be unable to pay the damages to the reclaimers. Enforcement of any decree for damages in the United States of America might be problematic. Maintaining the interim interdict, if the order for specific implement were recalled, would require the reclaimers to conduct their business in the United States of America in a particular way.

Submissions for the Respondents

(a) Interlocutor dated 30 July 2010

[19] Counsel submitted that the contractual relationship between the parties had subsisted for almost 20 years. The fact that the period of notice for termination of the contract in clause 1(a) had been extended from the initial period of 6 months to a period of 5 years and thereafter had been further extended to a period of 10 years was an indication that this contract between two commercial organisations had operated successfully in the past and that there had been no difficulty in understanding what was required of parties. As was conceded by the reclaimers, the respondents had a prima facie case. In general, there was no particular difficulty in requiring a party to perform a contract (Highland and Universal Properties Limited v Safeway Properties Limited). The policing of such orders in Scotland had not been a problem for the Scottish courts in the past (Retail Parks Investment Limited v Royal Bank of Scotland Plc (Number 2) 1996 SC 227). The commercial reality was that the parties had managed to perform the contract for many years. The Lord Ordinary had not erred in assessing the balance of convenience. It was difficult to see how the Lord Ordinary could have assessed the potential prejudice to the reclaimers arising from the possibility that they might be associated with the alleged breach by the respondents of the regulatory framework in the United States of America. In any event the Lord Ordinary dealt with this matter in paragraph 33 of his opinion.

[20] The contract conferred upon the respondents an exclusive right to purchase the reclaimers' brands for distribution in the United States of America. There was accordingly a correlative obligation on the reclaimers to sell whisky to the respondents in fulfilment of orders placed by them with the reclaimers. That was particularly so, as the respondents had an obligation to promote and to maximise sales of the reclaimers' products. The respondents also had an obligation to meet the agreed targets which increased annually. They required supplies of whisky from the reclaimers to meet that obligation. Clause 9 of the contract did not confer a discretion upon the reclaimers to refuse to accept an order, although there was no specific time within which they must accept an order. The decision of the Lord Ordinary to grant the interim order for specific performance did not amount to innovation. The reclaimers were being obliged to do no more than to accept orders in terms of the contract. While there may be hypothetical difficulties, it was ultimately a matter for the reclaimers to consider how to resolve these. They could always return to the court for guidance in the event of uncertainty. The exercise by the Lord Ordinary of his discretion in favour of the respondents was not plainly wrong. That was the appropriate test to be applied by an appellate court when reviewing a discretionary decision (Britton v Central Regional Council 1986 SLT 207).

(b) Interlocutor dated 11 August 2010

[21] Counsel agreed with counsel for the reclaimers that, if the order for specific performance was not recalled, it was appropriate to refuse to recall the interim interdict. However, it was not accepted that the converse was true. Even if the order in terms of section 47(2) of the Court of Session Act 1988 were recalled, it was still appropriate to grant interim interdict against the reclaimers, pending the currency of the present litigation, from selling whisky directly to distributors in the United States of America other than the respondents.

Discussion

[22] Following the hearings before the Lord Ordinary there has been a material change of circumstances, principally the payment by the respondents to the reclaimers of the outstanding debt of £239,882.90. Payment of that debt was a prerequisite of the respondents obtaining the benefit of the interim order ad factum praestandum pronounced by the Lord Ordinary on 30 July 2010. Furthermore, at the hearing of the reclaiming motion the court was advised that the respondents had ordered a quantity of whisky from the reclaimers and that order had been fulfilled, in part, by shipping a quantity of whisky to the United States of America. The submissions before the Lord Ordinary had focussed upon the non-payment of the debt and it is understandable why the Lord Ordinary considered that matter alone in the context of the question of innovation. In particular, it does not appear that the Lord Ordinary's attention was drawn to the terms of clause 9 of the contract, although it is fair to say that it appears that a copy of the contract was available to him. Nor apparently was any submission made to the Lord Ordinary about the effect upon the reclaimers' rights under clause 9 of the contract of a court order requiring the reclaimers to continue to accept orders from the respondents. Moreover, such a submission did not feature in the grounds of appeal or in the note of argument submitted on behalf of the reclaimers in advance of the reclaiming motion. This was in clear breach of the Rules of Court. Having said that, I observe that the argument was advanced on behalf of the reclaimers, without exception being taken on behalf of the respondents. In the course of the able submissions by junior and senior counsel for the respondents the argument was addressed and there was no suggestion that any prejudice had been suffered by reason of the manner in which the matter had been raised. It is unsatisfactory, as a general rule, that substantive submissions are made to the court without prior warning to other parties or to the court; the relevant Rules of Court are there to prevent that happening. However, I have concluded that, in the absence of any stated prejudice to the respondents, it is appropriate in all the circumstances of this case that the submission should be entertained. It would be artificial, in such circumstances, to exclude from my consideration a matter which acquired some considerable significance in the submissions made to the court.

[23] Before addressing the substantive submissions on behalf of both parties it might be of some assistance to consider the basic principles of law in the light of which I require to determine how to dispose of the reclaiming motion. The question of specific implement was considered in Highland and Universal Properties Limited v Safeway Properties Limited, a case in which Lord Kingarth gave the leading judgment and the Lord President (Rodger) added a few observations. From these opinions it is clear that a party to a contract in Scotland is entitled to enforce the contract by decree for specific implement. That right is subject to the court's discretion to deny such a remedy in exceptional cases. The discretion should only be invoked where there is a very cogent reason making it "inconvenient and unjust" to grant specific implement. Thus the discretion should be exercised "in order to prevent the party from whom performance would be required from suffering inconvenience and injustice." (Lord President Rodger at page 300). The second consideration to be borne in mind is that in determining an application under section 47(2) of the Court of Session Act 1988 the Lord Ordinary requires to follow the principles enunciated in Scottish Power Generation Limited v British Energy Generation (UK) Limited which are set out in the Lord Ordinary's opinion (paragraph [9]). In this case the Lord Ordinary correctly identified that the only substantive issues for his consideration were the third and fourth principles namely (a)  the need to avoid significantly innovating on the parties' contractual rights and obligations and (b)  "whether the balance of convenience is such as to justify the making of the interim order, bearing in mind the nature and degree of the harm likely to be suffered on either side by the grant or refusal of the interim order, and the relative strength of the cases put forward by each party." Thus although the right to decree of specific implement can only be defeated in exceptional circumstances, different considerations might apply to the grant or refusal of an interim order, as the Lord Ordinary recognised in his opinion dated 30 July 2010 (paragraph [36]). The reasons for such a distinction might appear self evident. The decision to grant decree for specific performance at the conclusion of a case will be informed by evidence or other material upon which the court has been able to reach a concluded view both as to the merits of the case and as to whether there are exceptional circumstances justifying the exercise of a judicial discretion not to pronounce the order sought. In contrast, at the early stages of litigation where the court does not have the advantage of established facts, one of the considerations ought to be to minimise the risk of harm to either party in the event that the decision to grant or refuse the interim order is ultimately proved to be wrong. I am reinforced in that view by the observations of Hoffmann J., as he then was, in Films Rover International Limited and Others v Cannon Film Sales Limited to the following effect:

"The principal dilemma about the grant of interlocutory injunctions, whether prohibitory or mandatory, is that there is by definition a risk that the court may make the 'wrong' decision, in the sense of granting an injunction to a party who fails to establish his right at the trial (or would fail if there was a trial) or alternatively, in failing to grant an injunction to a party who succeeds (or would succeed) at trial. A fundamental principle is therefore that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been 'wrong' in the sense I have described." (page 680E-F).

Although these observations are made in the context of English law and practice where the approach to orders for specific implement is different from Scotland, nevertheless it seems to me that the test of the lower risk of injustice is apposite when the Lord Ordinary is considering the nature and degree of the harm likely to be suffered on either side by the grant or refusal of an interim order in Scotland. The final principle that might have application in this case is that, insofar as the decision of the Lord Ordinary was based upon an exercise of his discretion, there are limitations on the power of the appellate court to interfere with the decision of the Lord Ordinary. As was observed in Britton v Central Regional Council the appellate court may not interfere with such a decision "unless it is satisfied either that he exercised his discretion upon a wrong principle or that, his decision being so plainly wrong, he must have exercised his discretion wrongly".

[24] Although the question of innovation featured in the second submission on behalf of the reclaimers, I consider that matter should logically be addressed first. If it can be established that the order pronounced significantly innovates on the parties' contractual rights and obligations, that seems to me to be conclusive and it would be unnecessary to consider whether the Lord Ordinary has erred in the exercise of his discretion when considering the question of the balance of convenience. The basis upon which the reclaimers allege that the order significantly innovates on the parties' contractual rights and obligations is founded upon clause 9 of the contract which is in the following terms:

"No order from you for the Brands shall be binding on us until accepted in writing by us. Subject to your rights under Clause 3.3(c) we shall not be liable for any loss occasioned by failure to supply or delay in supplying accepted orders. Time shall not be of the essence in this respect".

As I have already observed, this aspect of the case did not feature before the Lord Ordinary although the terms of the contract were before him. The contract is silent about the minimum and maximum size of any order placed by the respondents with the reclaimers. While the contract as a whole envisages a commercial relationship between the parties in which the respondents are obliged to promote the reclaimers' products in the United States of America, in exchange for the exclusive right to distribute such products there, and it is reasonable to conclude that the parties intended that the reclaimers would supply the respondents with their products to enable the respondents to fulfil their obligations towards the reclaimers, clause 9 envisages both the non-acceptance of an order and a failure to supply accepted orders. Both of these raise issues as regards the order pronounced by the Lord Ordinary. In addition to clause 9, the conditions of sale might also be of significance. These are regulated by clause 6 and by standard conditions of sale. Clause 6 of the contract is in the following terms:

"The Brands will be sold to you at WHYTE & MACKAY'S Export Price List ruling at the date of shipment and on our terms and Conditions of Sale applicable to export sales which are then current....".

Clause 1(b) of the reclaimers' International Conditions of Sale applicable to such orders is in the following terms:

"Each separate order for Goods by the Purchaser shall be deemed to be an offer made by the Purchaser to the Company for the purchase of these items of the Goods on these Conditions of Sale and such offer shall be deemed to be accepted by the Company only upon the issue to the Purchaser of the Company's written acknowledgement of the order. The entry by the Company into a contract for the supply of any of the goods (sic) shall not constitute or imply any obligation upon the Company to enter into any further contract for the supply of the Goods".

Thus each order is treated separately and there is no binding contract on the reclaimers to supply the goods specified in such an order until the reclaimers accept the order in writing. Despite the commercial arrangement between the parties it is understandable that the reclaimers, as the dominant party, might wish to refrain from accepting any particular order. There may be many sound commercial reasons for such a decision, including a desire to supply a more lucrative market or a desire to wait for a considerable period before accepting any orders, in anticipation of a significant price increase. The reclaimers might also elect, for commercial reasons, to refuse to accept a very large order or a particularly small order. By requiring the reclaimers to continue to accept orders from the respondents, the court order is apparently innovating on the reclaimers' right to treat each order as a separate entity and to refuse to accept an order placed with the reclaimers by the respondents. It would appear that, as a result of the order pronounced by the Lord Ordinary, the reclaimers are now bound to accept any order for the supply of whisky submitted by the respondents irrespective of the size of that order. Clause 9 operates as a control mechanism whereby the reclaimers would be entitled to refuse to accept a particular order because it might expose them to an unacceptable risk from a commercial point of view. It must be remembered that the goods are being shipped out of the jurisdiction of the United Kingdom in advance of payment. The respondents have already delayed in paying a substantial debt and only did so after payment was made a condition precedent of the Lord Ordinary's order becoming effective. As a result of the interlocutor dated 30 July 2010, the reclaimers would be precluded from rejecting an order for a substantial consignment of whisky, despite their assessment of the risk that they were thereby undertaking and despite any reservations they might have about receiving payment from the respondents. Moreover, as I have already observed, there may be other sound commercial reasons for the reclaimers declining to accept a particular order. They may wish to sell available supplies to a market other than the United States of America for various reasons. Despite any commercial reasons or other concerns that the reclaimers may have about accepting a particular order, the effect of the court order is that they are obliged to accept the order tendered by the respondents, under penalty of exposing themselves to a finding of contempt of court. Even if the reclaimers do accept every order placed by the respondents, are the reclaimers nevertheless entitled to fail to supply or to delay in the supplying of accepted orders? Clause 9 envisages such a situation and exonerates the reclaimers from any loss occasioned by such failure or delay. Counsel for the respondents conceded that there was no time limit within which the reclaimers had to accept an order. If an order placed by the respondents imposed a time limit for acceptance and for delivery of the goods to the United States of America, would the reclaimers be bound to accept it in compliance with the court order? If so, that would appear to innovate on the reclaimers' rights and immunities under clause 9 in respect of failures to deliver and delays in delivery. Clause 9 specifically states that time is not of the essence. In my opinion the innovation in this case would be significant and for that reason I would recall the order pronounced by the Lord Ordinary on 30 July 2010.

[25] Even if I am wrong in my conclusion that the obligation to accept orders imposed by the decree pronounced by the Lord Ordinary would be a significant innovation, nevertheless it seems to me that the inter-relationship between the court order and the terms of clauses 6 and 9 of the agreement and clause 1(b) of the reclaimers' International Conditions of Sale is a relevant factor to be taken into account along with the alleged illegality on the part of the respondents in the importation and distribution of the reclaimers' products when one considers the balance of convenience, if that matter becomes at large for this court. As I have observed, that can only arise if the conclusion is reached that the Lord Ordinary erred in the exercise of his discretion when assessing the balance of convenience. In determining whether the Lord Ordinary is in error in this respect, the test to be applied is strict and I have already referred to it.

[26] The Lord Ordinary approached this issue by considering in the first instance the impact upon the respondents of failing to pronounce the order sought. He concluded that the claims by the respondents about the financial impact upon them were exaggerated. He noted that no detailed information as to the financial consequences for the respondents was provided to the court when the application was initially made. He also observed that when information was eventually provided, it was far from satisfactory and he felt unable to attach any weight to the letter submitted to the court (para [31]). Despite that, on the basis of a schedule presented to the court and from ex parte statements, he concluded that it would not be possible for the respondents "to trim the overheads of a business such as this sufficiently to remain profitable without distributing John Barr products", and he recorded that senior counsel for the reclaimers "did not dispute that the refusal of the interim order sought might have significant adverse financial consequences" for the respondents. (para [32]). The Lord Ordinary contrasted that situation with that of the reclaimers and in doing so he relied upon the trading history between the parties for almost 20 years and concluded that it did not appear that the reclaimers would "suffer financial (or other) prejudice if the interim order sought is granted". (para [33]). The basis for that conclusion appears to me to result from a misunderstanding of the alleged illegality on the part of the respondents. In that regard the Lord Ordinary states:

"If there has been a failure on the part of the defenders to hold the necessary permits, certificates and permissions, it appears that this failure has persisted throughout the period of the parties' business relationship. There is no suggestion that this failure has had an adverse impact on the pursuers, nor on the reputation of their products. Until the alleged failures were discovered in the course of due diligence earlier this year, it appears that the business relationship between the parties was operating satisfactorily and to the mutual benefit of the parties".

Later, he observes:

"If the interim order is granted, the pursuers will be required to continue to supply the defenders with goods, and so to continue with a business relationship when they do not wish to continue in that relationship. However, it is difficult to see how this might affect adversely their reputation - they would merely be continuing to supply the contractors who had acted as their distributors for much of the last two decades. There is no suggestion that the defenders are in imminent danger of being prosecuted in respect of any of the failures relied on by the pursuers, nor is there any indication that any enforcement action is contemplated".

It respectfully seems to me that the Lord Ordinary has plainly misunderstood the significance of the alleged illegal activity. The successful relationship between the parties in the past proceeded in ignorance of the alleged illegal activity. That activity has not yet had an adverse impact on the reclaimers or on the reputation of their products not least because it is not yet in the public domain. It seems to me that a different situation might well prevail following upon the acquisition by the reclaimers of knowledge of the true position. Even although the situation has been rectified, if indeed it has, future trading by the reclaimers would be with persons who on this hypothesis had been in breach of the law for many years in relation to the reclaimers' products. Such continued activity may well have an adverse effect upon the reputation of the reclaimers and on their products. Moreover while there may be no suggestion of the respondents being in imminent danger of being prosecuted nor any indication of enforcement action being contemplated, that must be seen in the context of the ignorance of the authorities of the true position. It is not unreasonable to anticipate that if the regulatory authorities become aware of the situation, they might well take action against the respondents in respect of breaches of the law over a prolonged period. If the regulatory authority also discovers that the reclaimers are continuing to trade with the respondents in the knowledge that they have been engaged in illegal activity in relation to the reclaimers' products, this may well adversely affect their reputation with the regulatory authority and others.

[27] A second issue which seemed to influence the Lord Ordinary in the exercise of his discretion was that it might be argued that the interim order would be in the interests of the reclaimers. In that regard the Lord Ordinary observed:

"It is clear from the terms of the summons that the pursuers do not intend to make alternative arrangements for the distribution and sale of their products in the United States until this litigation has been finally concluded in their favour".

That observation was made on the basis of the averments and at a time when the Lord Ordinary was unaware of the letter purporting to appoint a third party as an agent for the reclaimers in the sale and distribution of their products in the United States of America and I take no issue with the Lord Ordinary's observation in that regard. However, he continued:

"In view of the exclusive right to purchase which the agreement conferred on the defenders, and the terms of Clause 4 thereof, it is unlikely that any John Barr Scotch whiskies will be sold and distributed in the United States of America until the conclusion of this litigation. There are averments on behalf of both parties which mean that it is likely that evidence will require to be led before the issues between the parties can be determined. Thereafter, standing the apparent importance of this matter to both parties, the possibility that the matter will be reclaimed to the Inner House cannot be excluded. A final determination of the issues may be many months, or years, away. During this period without an interim order being granted both the pursuers and the defenders will be denied the profits of the sale of John Barr brands in the USA, and the reputation of the brand in that market is likely to diminish".

While it is understandable that the Lord Ordinary concluded that the reclaimers did not intend to make alternative arrangements for the distribution and sale of their products in the United States of America, he has erred in concluding that the terms of clause 4 of the Agreement render it unlikely that any of the reclaimers' products will be sold and distributed in the United States of America until the conclusion of the litigation. Clause 4 simply precludes the reclaimers from appointing any other distributor for the sale of the brands in the United States of America and from selling the brands directly to customers there. However, the clause specifically reserves to the reclaimers the right to sell the brands to a customer outside the United States of America who in turn is enabled to import the products into that country. Thus, by means of indirect sales, the reclaimers' products can be sold and distributed in the United States of America pending the litigation. In that situation the reclaimers will not be denied the profits from the sale of their products in the United States of America and the reputation of their products in that market is therefore unlikely to diminish by reason of their non-availability. Accordingly I am of the opinion that the Lord Ordinary has reached conclusions as regards the reclaimers which are plainly wrong. For that reason in assessing the balance between the interests of the respective parties the Lord Ordinary has erred and the issue is at large for this court.

[28] In undertaking the balancing exercise there is on the one hand the conclusion of the Lord Ordinary that it seems likely that the respondents will not be profitable for the remainder of 2010 and possibly for some period beyond that. The Lord Ordinary was unable to express a definite view as to whether the respondents would be able to continue trading but, even if they were, he considered that they would suffer the loss of profits which they have enjoyed from distributing the reclaimers' products and will probably suffer some damage to their business reputation. As against that, the reclaimers will be forced to continue trading with someone whom they allege to have acted illegally as regards the reclaimers' products in the past. By doing so, they risk damage to their reputation and their products, particularly if the regulatory authority and others become aware that they continued to trade with the respondents in the knowledge of the respondents' illegal activity, notwithstanding that continued trade was at the direction of a court. The reclaimers will be able to continue to sell their products indirectly to the market in the United States of America, resulting in their continued receipt of profits from such sales and the continued exposure of their products to that market, thereby avoiding a diminution in the reputation of their brands. I also consider that it is relevant to take into account the possible effect of the interim order ad factum praestandum upon the reclaimers' rights under clauses 6 and 9 of the agreement and clause 1(b) of the reclaimers' International Conditions of Sale. I have already referred to various issues in that regard in the context of my conclusion that the interim order would be a significant innovation on the rights and obligations of parties. However, if I had concluded that the innovation was not significant, I would have taken these factors into account in assessing the balance of convenience. The size of any order, the commercial risk associated with accepting an order, the commercial interests in favouring particular markets at different times, prospective price increases and, I suspect, many other commercial considerations will influence the reclaimers in their decision whether to accept any order and, if so, when. These commercial considerations favouring the reclaimers should be considered in the balance against the financial consequences facing the respondents in deciding whether the court should pronounce the interim order sought. Having considered all of the issues in respect of both parties, I am of the opinion that it would be unjust and cause inconvenience to the reclaimers if they were obliged to continue to accept orders from the respondents pending the determination of the litigation. In all the circumstances I am satisfied that the balance of convenience is in favour of refusing the interim order and for that reason I would recall it. To that extent I would allow the reclaiming motion.

[29] The sole remaining issue relates to the interim interdict pronounced by the Lord Ordinary on 11 August 2010. I reject the submission on behalf of the reclaimers that the decision in respect of the order under section 47(2) of the Court of Session Act 1988 should determine my decision as regards the recall of the interim interdict. The interim interdict prevents the reclaimers from selling their products directly in the United States of America to anyone other than the respondents in breach of the express terms of clause 4. To recall the interim interdict would have the effect of determining all issues between the parties because the reclaimers would be free to appoint new distributors, the result of which would be that the court would probably be precluded from making an order for specific performance even if the respondents were ultimately successful in this litigation. In contrast the consequences for the reclaimers of not recalling the interim interdict will be that they will require to trade indirectly in the United States of America pending the determination of the litigation. While that might result in inconvenience and additional costs for the reclaimers, these should be substantially less than if the effect of the interim interdict had been to sterilise the American market altogether. In any event such inconvenience and additional costs are more than outweighed by the desirability of leaving available to the court, after proof, the possibility of re-instating the respondents as sole distributors in the United States of America of the reclaimers' products. In the circumstances I would refuse the reclaiming motion insofar as it relates to the recall of the interim interdict pronounced on 11 August 2010.

Decision

[30] For the foregoing reasons I would allow the reclaiming motion to the extent of recalling the interim order ad factum praestandum pronounced on 30 July 2010. Quoad ultra I would refuse the reclaiming motion.