Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 106
CA87/10	OPINION OF LORD MENZIES in the cause WHYTE AND MACKAY LIMITED Pursuers; against CAPSTONE INTERNATIONAL INCORPORATED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Reid, Q.C.; McClure Naismith, LLP

Defenders: McBrearty; Brodies, LLP

30 July 2010

Introduction
[1] The pursuers carry on business as distillers of whisky. The defenders carry on business as distributors of alcohol in the United States. The parties entered into a Distribution Agreement dated 3 and 20 December 1993 ("the agreement") in which the pursuers granted the defenders the exclusive right to purchase John Barr Scotch Whiskies in the United States. The defenders were obliged to use their best endeavours to maximise sales throughout the United States and to promote John Barr Whiskies as top quality Scotch whiskies. By Clause 4 of the agreement the pursuers undertook during the defenders' appointment not to appoint any other distributor for the sale of John Barr Scotch Whiskies in the United States and not to sell John Barr Scotch Whiskies directly to customers in the United States.

[2] The pursuers aver that the distribution and sale of alcohol in the United States is an activity which is regulated both by the Federal Government, and by individual states, and that in order lawfully to distribute and sell alcohol in the United States the defenders 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 they would also require the regulatory permissions applicable to each individual state in which they distributed.

[3] In the early part of 2010 negotiations were ongoing for the pursuers to purchase the defenders' business. In the course of these negotiations those acting on behalf of the pursuers were carrying out due diligence in regard to the defenders' business. In the course of these investigations the pursuers aver that they discovered that the defenders did not hold any of the permits, certificates or permissions referred to above. Appropriate permissions were held by another company related to the pursuers, Emerald Brands Incorporated ("Emerald"). The pursuers aver that the defenders' failure to obtain the permissions necessary lawfully to discharge their obligations under the agreement, and their purported discharge of those obligations in an unlawful manner, were material breaches of the agreement.

[4] Paragraph 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 within 14 days of notice requiring remedy having been served)."

[5] By letter dated 6 April 2010 the pursuers gave notice to the defenders in terms of Clause 3.3(c) of the agreement requiring the defenders to remedy (and demonstrate to the pursuers' 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 this notice. By letter dated 19 April 2010 the defenders' American attorneys replied to the pursuer's letter of 6 April 2010. In that reply it was denied that the defenders were in breach of the agreement, and asserted that the defenders have and continue to fully perform their obligations under the agreement. Moreover, the letter went on to explain that a merger had taken place between Emerald and the defenders, which would have the effect that any licensing error that previously existed has been fully remedied. By letter dated 23 April 2010 the pursuers wrote to the defenders observing that the fourteen day period for remedy of material breaches had now expired, and that the defenders had been unable to demonstrate to the pursuers' satisfaction that the material breaches referred to in the letter of 6 April had been remedied. Specifically, appropriate releases from liability from the TTB and all relevant subject state regulatory authorities had not been obtained. The pursuers maintained that they were therefore entitled, pursuant to Clause 3.3(c) of the Agreement, to terminate the agreement forthwith, and accordingly they confirmed that the agreement was terminated with immediate effect.

[6] In the present action the pursuers seek declarator that the agreement (as subsequently amended by addenda which are not relevant for present purposes) was validly terminated by the pursuer's letter dated 23 April 2010. By amendment the pursuers have added a further conclusion for payment of the sum of £239,882.90 which they assert the defenders are due in respect of supplies of Scotch whisky delivered to the defenders but not yet paid for.

[7] The defenders have lodged a counterclaim in which they seek an order ad factum praestandum ordaining and requiring the pursuers to continue, pending the currency of the current litigation and until valid termination of the agreement, 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 Stated of America, all in terms of said distributorship 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 defenders seek payment by the pursuers to them of the sum of $10,000,000 as damages for the pursuers' breach of contract.

[8] The matter came before me on the defenders' motion for an interim order in terms of the first conclusion of the counterclaim.

Submissions for the defenders
[9] Counsel for the defenders submitted that in appropriate cases the Court is prepared to grant an interim order ad factum praestandum in order to continue existing supply arrangements - Millar & Bryce Limited v Keeper of the Registers of Scotland 1997 S.L.T. 1000. The principles which fall to be applied in an application of this nature under Section 47(2) of the Court of Session Act 1988 were authoritatively set out by the Inner House in Scottish Power Generation Limited v British Energy Generation (UK) Limited 2002 SC 517 at paragraph [26] 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."

[10] In the present case the counterclaim is inextricably linked to the issues in the principal action. Those issues are agreed by the parties in their joint statement of issues (number 9 of process) as being (1) whether the defenders breached the agreement by not holding the appropriate regulatory permissions in their own name; (2) if that did constitute a breach of the agreement, whether the defenders took sufficient steps to remedy that breach; and (3) if there was a breach of the agreement and that breach was not remedied by the defenders, whether the pursuers have waived their rights to found upon that breach. The defenders' position in the counterclaim is that the pursuers' purported termination is not justified and accordingly the pursuers are obliged to perform their contractual obligations. The same prima facie issues arise in the counterclaim as arise in the principal action.

[11] The issue in the counterclaim is whether the pursuers require to perform their contractual obligations under the agreement. This turns on whether the pursuers are in breach of contract in refusing to do so, and that depends on whether they were entitled to terminate the agreement. The core issue is whether the pursuers must fulfil their contractual obligations, and the interim order sought is simply seeking to oblige the pursuers to perform their contractual obligations pending the outcome of the action.

[12] With regard to whether the defenders have demonstrated a prima facie case that the pursuers' obligation exists and that there is a continuing or threatened breach of that obligation which the order will address, both parties have agreed the prima facie issues in the principal action, and these apply equally in the counterclaim. The defenders need only show that they have a prima facie case in relation to any one of the three issues identified above. With regard to the first of these issues, the averments in Answer 7 of the defences will require to be supported by evidence in due course from a US attorney, but are sufficiently relevant to amount to a prima facie case at present. With regard to the second issue, again there were sufficient averments on behalf of the defenders to amount to a prima facie case; counsel referred me to an excerpt from the US Code of Federal Regulation, Title 27, Article 1.44, and to a document headed "Basic Permit (under Federal Alcohol Administration Act)" naming the defenders as the permitee and showing the date of application as being 15 April and the date of permit 5 May 2010. Looking to the past, the pursuers seek an assurance that there will be no enforcement by the regulatory authorities with regard to any past breach of the law. Counsel submitted that such an assurance would not cure a past breach and did not amount to a remedy. On any view he submitted that the defenders had a prima facie case on the second issue. With regard to the third issue, namely waiver, the defenders' position was that the pursuers had been aware for many years that import permits ran in the name of the defenders' associated company Emerald. This understanding even predated the agreement: Counsel referred to a letter from the pursuers dated 23 October 1991 (number 7/1 of process) and to a letter from the pursuers dated 12 July 2007 (number 7/3 of process) in which the pursuers reconfirmed the appointment of Emerald (doing business as Capstone International) as sole US importer of the John Barr range of products. The defenders' position was that the pursuers were fully aware of the permit position throughout the duration of the agreement, and acquiesced in it. The defenders therefore had a good prima facie case on each of the three issues.

[13] Returning to the principles enunciated in paragraph [26] of the Scottish Power Generation case, counsel submitted that there was no question of innovating on the parties' contractual rights and obligations as a result of this order. All the defenders sought was an order for the pursuers to implement their contractual obligations.

[14] Turning to the balance of convenience, the Court was entitled to have regard to the relative strength of the cases put forward by each party. It was perhaps difficult to reach a view as to the relative strength of the cases on the first and third issues at this stage, but counsel submitted that the defenders have put forward a strong and convincing case with regard to the second issue, and that this was a factor in favour of the defenders' motion. More importantly, however, if an interim order as sought was not granted, the consequences for the defenders would be potentially catastrophic and they might cease to trade. It would be undesirable to allow a long-standing business to collapse solely on the basis of a decision by the pursuers which was possibly in breach of their contractual obligations. The effect on the defenders if this interim order were not granted would not be capable of being compensated by an award of damages. The defenders as a corporate entity would be likely to have ceased to exist, jobs would be lost and in any event damages would be very difficult to quantify. It was clear from the terms of the summons that the pursuers did not intend to appoint a new distributor for their products in the United States until these proceedings were concluded; pending the outcome of this litigation there would therefore be no new consignments to the United States market, and if the defenders are successful the strength of the brand (and accordingly their revenues and profits from distributing it) would be diminished. It would not be straightforward to construct any claim for damages. If there has indeed been a breach of the defenders' obligations, this breach has been ongoing for about 20 years with no adverse effect for the pursuers; it was difficult to see where the prejudice to the pursuers would arise from an interim order being granted as sought. Counsel submitted that the balance of convenience strongly favoured the granting of an interim order.

[15] With regard to the sum claimed by the pursuers in their new second conclusion, this was a neutral factor in considering the issues before the Court, standing the defenders' stated intention to pay this sum in the event of an interim order being granted. In the event that no such order were granted, the defenders would be entitled to retain this sum against their claim for damages for breach of contract. In this regard counsel referred me to Inveresk plc v Tullis Russell 2010 UKSC 19.

Submissions for the pursuers
[16] Senior counsel for the pursuers invited me to refuse the motion. He accepted that the defenders had demonstrated a prima facie case, and directed his submissions towards the balance of convenience, maintaining that having regard to all the relevant circumstances, the nature and terms of the contract and the fact that there was a large outstanding debt owed by the defenders to the pursuers it was inappropriate that the interim order sought should be granted, and the balance of convenience favoured refusal. He referred to seven factors in support of this submission:

(1) This was a contract which involved mutual trust and confidence. Although the relationship was neither agency nor partnership (and this was expressly disclaimed in Clause 10 of the agreement) there were elements of this relationship which appeared in both agency and partnership. Trust and confidence between the parties had plainly broken down. It had become apparent in the course of the due diligence process that the defenders had never had the necessary federal import permissions. Although this had caused no practical difficulties over the many years of the parties' relationship, there was still a risk that if it came to the attention of the federal authorities there might be adverse consequences not only for the defenders but also for the John Barr brand. The defenders' averments suggest that the federal permit is in the name of Emerald "DBA Capstone International", but in the course of the due diligence process it had become clear from tax documentation that Emerald does not declare taxable income and does not trade, and all the income from the distribution of the pursuer's whiskies is income of the defenders. The entity doing the business has always been the defenders, not Emerald. This was relevant to the issue of the trust and confidence which the defenders hitherto reposed in the defenders. A contract involving trust and confidence will not generally be enforced by means of specific implement.

(2) The Court will not generally compel performance of a contract which involves the provision of services and co-operation. The present agreement involves the provision of services by the defenders - for example, Clause 2 of the agreement requires them to use their best endeavours to maximise sales and promote the brands.

(3) The Court will generally not order specific implement of continuing obligations where they proceed over a lengthy period. The current notice period for termination without cause under Clause 1 of the agreement had been extended to ten years. This is a lengthy distribution relationship.

(4) The Court will not generally enforce contractual obligations which are expressed in the form of "best endeavours". The fact that the defenders would use their best endeavours to maximise sales and to promote the brands was clearly at the forefront of this contract.

(5) The interim order sought would innovate significantly on the parties' contract. What the defenders effectively seek is the insertion of a clause which provides for temporary suspension of the notice of termination in the event of a dispute as to its effect until that dispute has been resolved. In a contract of this nature, that would be most unusual. It is unclear what the juridical basis of the parties' relationship would be, during the interregnum, if the pursuers ultimately succeed in this action. The other innovation is that a change in the credit term arrangements operated between the parties is being sought. The Court is being asked to give effect to a proposal (expressed as an intention, which is not enforceable) whereby the pursuers would be obliged to supply an unspecified quantity of whisky to the defenders before the defenders had made payment of outstanding sums due.

(6) The defenders themselves are in material breach of contract in that they are indebted to the pursuers to the extent of some £239,000. That is a debt which has been accumulating since the end of 2009. On general contractual principles, the pursuers would be entitled to suspend performance where the defenders are unwilling to comply with their obligations. It would be inequitable to ordain the pursuers to supply more whisky to the defenders when large outstanding debts have been accumulating and remain unpaid. The Court should attach little weight to the argument that this is a cash flow problem caused by the pursuers' refusal to supply further whisky, particularly as it now appears that about 70% of the defenders' revenue comes from sources other than their relationship with the pursuers.

(7) Damages would be an adequate remedy in the event that the defenders are ultimately successful in this litigation. The pursuers are a substantial business entity and would be able to pay any award of damages which might be made. The primary method of calculation of such damages would be the defenders' loss of profit occasioned by the pursuers' breach of contract; that is something which has been addressed regularly by Courts over many decades, normally by averaging profits over a number of previous years.

[17] Having regard to all of the above factors, senior counsel submitted that it was not appropriate to make an order ad factum praestandum in the present case. He pointed out that it did not appear that any argument as to the appropriateness of such an order was made to the Court in Miller & Bryce Limited v Keeper of the Registers of Scotland. In support of the proposition that the Court should be slow to order specific implement he referred me to Gloag on Contract at page 657, Burn Murdoch on Interdict at paragraphs 178 and 187 and Walker's Civil Remedies at pages 280-281. The present contract involves an intimate relationship involving trust and confidence between the parties over a long contractual period and involving the provision of services. He referred me to McArthur v Lawson (1877) 4 R. 1134, particularly the Opinions of Lord President Inglis at 1136 and Lord Shand at 1138; Postel Properties Limited v Miller & Santhouse plc 1993 S.L.T. 353 (particularly at 356E/F), and Scandinavian Trading Tanker Co A.B. v Flota Petrolera Ecuatoriana [1983] 2 A.C. 694. He submitted that the weight of authority was wholly against the granting of an interim order in such circumstances as these, which would give rise to practical difficulties and would be most unusual. Damages are the normal and adequate remedy in the event that the pursuers are unsuccessful.

Response for the defenders
[18] Counsel for the defenders submitted that the pursuers were exaggerating the close nature of the relationship between the parties. Clause 10 expressly provided that the defenders' relationship with the pursuers should be that of an independent contractor and not of agency. This was a contract for services, not a contract of service. It was an ordinary commercial contract, which did not involve the additional level of trust to be found in cases involving marriage, partnership, agency or personal employment. Moreover, with regard to the argument that specific implement was inappropriate where there was a long contractual term, a different view should apply at an interim stage when the Court was merely regulating matters pending resolution of this litigation. With regard to the "best endeavours" argument discussed in Postel Properties, this might be significant where the party who was obliged to use best endeavours was the party refusing to perform its contractual obligations; however, it is not relevant in the present case, where it is the defenders who are obliged to use their best endeavours, they are prepared to continue to do so, and there is no suggestion that they have failed in this obligation.

[19] The circumstances in the present case were not dissimilar to those in the Miller & Bryce case. That case involved contractual arrangements which the Keeper sought to terminate, and the Court granted an interim order ad factum praestandum to maintain the contractual arrangements pending the outcome of the litigation. That case might be described as more extreme than the present case, because not only was there a commercial relationship in that case, but the Court granted the interim order sought despite the fact that the parties were operating in competition with each other. The attitude of the Scottish Courts to applications for specific implement was quite different from that of the English Courts; in Scots law, unlike English law, a party to a contractual obligation was, in general, entitled to enforce that obligation by decree for specific implement as a matter of right, subject to a residual discretion in the Court to refuse such an order. In support of this proposition counsel relied on Highland and Universal Properties Limited v Safeway Properties Limited 2000 SC 297. It was clear from this (and particularly the Opinion of the Lord President at page 301G/H) that the passages in Gloag and Burn Murdoch on which the pursuers relied were exceptional categories of cases quite different from the present circumstances.

[20] The interim order sought would not amount to innovation as this term was discussed in the Scottish Power Generation case. Innovation involves forcing the parties to do something not contemplated in the contract at all - for example, obliging the pursuers to supply wine to the defenders, instead of whisky. What is sought is simply an order requiring the pursuers to fulfil their contractual obligation. It is equivalent to an order for interim delivery of property pending the outcome of an action, in which the contract contains nothing about interim possession of property during a dispute, but the Court is empowered to make an order because it is the subject matter of the cause. With regard to the argument that there would be innovation as a result of extension of credit for the sum unpaid and outstanding, this was a liquid debt to which the defenders were entitled to apply retention in relation to their illiquid claim for damages. Counsel gave a formal undertaking that this sum would be paid, in the event of an interim order being granted, no later than 60 days from the first delivery to the defenders of the pursuers' products on the same terms as were in place on 20 March 2010. If an interim order were not granted, the defenders' position would be that they were entitled to retain this sum against their claim for damages.

[21] With regard to the sixth factor relied on by the pursuers, namely that the defenders were in material breach of contract by having failed to pay the outstanding sum, the undertaking referred to above neutralised this point. In any event, a breach of contract by the defenders is of itself not sufficient to allow termination of the contract, in the absence of a notice and option to remedy the breach. Finally, the potential effects on the defenders of not granting the interim order sought were so great that damages would not be an adequate remedy. In addition to the directors of the defenders, they employed five employees and had twenty eight brokers who were independent contractors. If no John Barr Scotch Whiskies were sold in the USA before the conclusion of this litigation, the brand would be severely damaged, and even if the defenders were able to avoid being wound up, their business and reputation would be irreparably damaged.

Response for the pursuers
[22] Senior counsel told me that a spreadsheet had been prepared showing how the sum of £239,882.90 was made up. Some items related to whisky supplied in September 2009 for which payment was originally due on 31 December 2009. The defenders were in material breach of their contract by non-payment of these sums and the pursuers were entitled to suspend performance as a result. If the Court were to grant an interim order on the basis of the defenders' undertaking, this would amount to an innovation on the contractual terms for payment. These terms required payment within 90 days. All the sums sought related to supplies more than 90 days ago, and the whole sum was now due for payment. Senior counsel reiterated the importance of trust and confidence in the parties' business relationship, and maintained that it would not be appropriate to grant an interim order as sought.

Further procedure
[23] I was concerned about lack of detailed information as to the consequences for the defenders if this interim order were not to be pronounced. I was also concerned about the terms of the undertaking which had been given on behalf of the defenders. I continued the hearing on this motion overnight to enable instructions to be obtained from the defenders on these two matters.

[24] On the following day counsel for the defenders told me that it was accepted that the majority (but not all) of the sum of £239,000 was a liquid debt now due, but this did not mean that it fell to be paid forthwith. Three orders dated 30 September 2009 for a total of over £65,000 were goods supplied at the pursuers' request which were beyond the defenders' requirements at that time, and for which extended payment terms applied as a result of which payment was not due until 90 days after the stock was removed from bond. It was accepted that all of this stock had now been removed from bond. Counsel revised the undertaking given on the previous day to the extent that payment of the sum of £239,882.90 would be made on the date of first delivery of the pursuers' goods to the defenders on the same terms as were in place on 20 March 2010. Moreover, if the interim order were to be granted, the defenders would not seek to apply retention so as to withhold payment of sums due in relation to any new orders against the damages sought in terms of the counterclaim. In the absence of an interim order being made, the defenders would argue for retention of the whole sum. This was an important concession when considering the balance of convenience. It would not be appropriate to require the defenders to make payment of this sum forthwith, (a) because the payment would be funded by a loan to the directors of the company in their personal capacity, and not from the company itself, and, (b) because the defenders wished to ensure that once the interim order was granted the pursuers would deal with them in good faith. If the pursuers took the view that they were entitled to terminate the contract because of the defenders' non-payment they could issue a notice to this effect.

[25] With regard to the impact on the defenders if no interim order were to be granted, counsel referred to a spreadsheet headed "Capstone Valuation Impact" which had been prepared by one of the directors of the defenders. This showed that in the period from January 2009 to May 2010 approximately one third of the defenders' turnover was derived from John Barr goods, but that the profit margin on these goods was significantly higher than the margin achieved on other goods. Counsel conceded that this spreadsheet did not give full information as to the defenders' overheads, nor the proportion of those overheads related to John Barr products, nor the financial contribution made to marketing and advertising made by John Barr products. However, he submitted that it was clear from the spreadsheet that if turnover and profits relating to John Barr products were stripped out of the figures, the defenders would be making a significant loss. Their profits would not cover their overheads in any of the months for the rest of 2010. They were a relatively small business with only five employees, and it would not be possible to restrict overheads to remedy this situation. A letter dated 23 July 2010, with attached handwritten figures, was also produced. The letter, although unsigned, bore to be from Mr Leo Ruggiero. It appeared that he provided an accounting and tax service from an address in New Jersey, but it was not clear what his relationship was to the defenders. He expressed the opinion that:

"The loss of the John Barr products would have catastrophic effect on the survival of the company. Even with cutbacks in personnel, salaries and other expenses it would not be sufficient to offset the loss of income from John Barr. It is apparent that the company would revert back to an operation prior to John Barr, which was a consistent loseing (sic) operations (sic). It is the best interest of this company to continue with the John Barr products on an ongoing basis."

Counsel conceded that this letter did not add much to his position. However, it was clear that there was a risk to the continuing viability of the defenders if an interim order was not pronounced. There would be less tangible effects too - word was already getting out to the defenders' customers that they had "lost the John Barr brand", with consequent damage to their reputation. At the very least, refusal of the interim order would have a clear adverse financial impact on the defenders; by contrast, it was not apparent that there would be any adverse financial impact on the pursuers were the interim order to be granted.

[26] In reply senior counsel for the pursuers maintained that the revised undertaking still innovated upon the terms of the contract. In any event it would be inequitable to expect the pursuers to resume supply to the defenders without first having received payment of outstanding debts. The Court should give little or no credence to the financial information now available; the defenders came to Court on the basis of extreme averments in their counterclaim to the effect that the pursuers' refusal to fulfil orders was crippling the defenders' business, and that without an interim order the defenders' business would be ruined. Counsel for the defenders had on the previous day described the effect of refusal of the interim order on the defenders as "catastrophic" and this description was repeated in Mr Ruggiero's letter. It was now clear that all that could be said was that there would be some financial impact on the defenders.

[27] The proposed undertaking still amounted to a provision for deferred payment, for which no provision was made in the agreement or in the parties' contractual arrangements. It removed the right of the pursuers to serve a notice demanding payment of the outstanding sum within fourteen days, to which the pursuers are entitled in terms of the agreement. In answer to a question from the Court, senior counsel conceded that he found it difficult to advance an argument that it would be incompetent for the Court to require payment of outstanding sums due before any interim order took effect, but the practical difficulties inherent in such an order would remain. He drew attention to apparent deficiencies and lack of detail in the schedule headed Capstone Valuation Impact, and suggested that the only conclusion which could be drawn from this was that there would be some financial impact on the defenders if an interim order was not granted, but that it was not established that this would be catastrophic. Nothing could be taken from Mr Ruggiero's letter; his qualifications and experience were not stated, nor was his relationship to the defenders; his views were vague and variable. Senior counsel renewed his opposition to the motion.

Discussion
[28] Parties were agreed that the issue before me requires to be addressed applying the principles enunciated by the Inner House in Scottish Power Generation Limited v British Energy Generation (UK) Limited. There was no issue between the parties with regard to the first and second of these principles. I agree with the submission for the defenders that the issue in the counterclaim is whether the pursuers required to perform their contractual obligations under the agreement; this depends on whether the pursuers were entitled to terminate the agreement on the basis of the defenders' alleged breach of contract. It was also not disputed that the defenders have made out a prima facie case. It is of course impossible (and would be quite improper) for me to speculate at this stage as to the final result of this litigation, and I do not do so. Suffice it to say that I am satisfied, broadly for the reasons advanced by counsel for the defenders, that the defenders have made out a prima facie case in their written pleadings.

[29] The third principle to which I must have regard is that I have to avoid significantly innovating on the parties' contractual rights and obligations. I am aware of this, and in some respects have found this the most difficult aspect of the present application. I shall revert to this matter in due course.

[30] The fourth principle is that I must consider whether the balance of convenience is such as to justify the making of the interim order sought 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.

[31] I am inclined to agree with the view expressed by senior counsel for the pursuers that the description of the impact on the defenders if this order is not granted, which was originally stated to be "catastrophic" and "crippling", contained an element of exaggeration. I regard it as most unsatisfactory that the defenders should come to Court making the present application without having first provided the Court (and the pursuers) with specific, detailed information as to the financial consequences for the defenders if the interim order sought were to be refused. Moreover, the information which was eventually provided on the second day of this hearing was itself far from satisfactory and fell short of what I should have expected to have been produced at the outset. In particular, Mr Ruggiero's letter were so deficient in its explanation as to the author's qualifications, experience, relationship with the defenders and ability to comment on the defenders' business, and was so vague and variable in its terms, that I felt unable to attach any weight to it.

[32] However, it is clear from what I was told at the Bar and from the schedule headed "Capstone Valuation Impact" that the defenders are a relatively small organisation, and that the distribution of the John Barr brands forms quite a significant part of the defenders' turnover and a larger part of their profits. I am prepared to accept that it will not be possible for the defenders to trim the overheads of a business such as this sufficiently to remain profitable without distributing John Barr products (unless they enter a similar contractual arrangement with other suppliers, to replace their agreement with the pursuers). Indeed, senior counsel for the pursuers did not dispute that the refusal of the interim order sought might have significant adverse financial consequences for the defenders. I cannot venture a view on the information presently available as to how significant these consequences will be. It seems likely that the defenders will not be profitable for the remainder for 2010, and possibly for some period beyond that. It is possible that they will not be able to continue trading, but I cannot express a more definite view at this stage. Even if they are able to continue trading, they will suffer the loss of the profits which they have made in the past from distributing the pursuers' products, and it is probable that they will suffer some damage to their business reputation.

[33] By contrast, it does not appear that the pursuers will suffer financial (or other) prejudice if the interim order sought is granted. They have traded with the defenders for almost twenty years. 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. Indeed, it might be argued that an interim order such as that sought would be in the interests of the pursuers themselves. 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. 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. 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 distributers 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.

[34] Senior counsel for the pursuers made much of the argument that this was a contract involving mutual trust and confidence. No doubt any business relationship involves some element of mutual trust and confidence. I am not persuaded that the relationship between the pursuers and the defenders involved this to an unusual extent. The agreement expressly provided that the defenders were not agents, but were independent contractors. It is true that they were obliged to use their best endeavours to maximise sales and to promote the brands as top quality Scotch whiskies, but this is not the sort of obligation which involves an unusual amount of trust and confidence. Moreover, there is no suggestion that the defenders have failed in the fulfilment of this obligation. Although this obligation involved an element of the provision of services, this was incidental to the defenders' status as an independent contractor purchasing goods from the pursuers for onward distribution. This is a very different category of contract from those considered by Gloag, Burn Murdoch and Walker in the passages relied on for the pursuers. It is quite different from those contracts which the Court held in McArthur v Lawson would not be the subject of an order for specific implement, such as an engagement to marry, a contract of personal service or to enter into a partnership.

[35] Miller & Bryce Limited v Keeper of the Registers of Scotland is an example of the Court granting an interim order ad factum praestandum in terms of Section 47(2) of the Court of Session Act 1988, and there are points of similarity between the circumstances of that case and the present case. Provided that the principles enunciated in Scottish Power Generation Limited are satisfactorily considered, I see no reason why an order ad factum praestandum should not be granted on an interim basis. Scots law has always differed from English law in its readiness to allow a party to a contractual obligation to enforce that obligation by decree for specific implement as a matter of right, and this was emphasised in Highland and Universal Properties Limited v Safeway Properties Limited. The observations of Lord Diplock in the Scandinavian Trading Tanker case related specifically to the English Courts, and I do not consider that they apply in the present circumstances.

[36] In any event, different considerations may well apply when considering whether to grant an interim order in terms of Section 47(2) of the 1988 Act from the considerations which might apply when granting an order for specific implement in perpetuity or as a final decree in a litigation. Senior counsel for the pursuers submitted that if it was inappropriate to grant specific implement at the end of a case, it cannot be appropriate to do so as an interim measure. I disagree. Lord Sutherland's observations in Postel Properties (at page 356E-F) must be read in the context of that case, which involved a "keep open" clause in a lease for a twenty five year period. Different considerations may apply when what is being sought is an interim order for the continuation of the sale of goods pending the outcome of a litigation. Moreover, I agree with the observation made by counsel for the defenders that the "best endeavours" requirement in the present agreement is not relevant to the point in issue. Although it was touched on in the Postel Properties case, in the present case there is no suggestion that the defenders are unable or unwilling to use their best endeavours, nor that they have failed to do so in the past. Although this is a term in the parties' agreement, it is not relevant to the issue which I have to decide.

[37] It is difficult, if not impossible, at this stage of the proceedings to assess the relative strength of the cases put forward by each party, and I do not attempt to make a detailed assessment of these. However, in light of the defenders' averments regarding the merger of Emerald and the defenders, and the consequences of this merger in terms of US federal law and practice, taken together with the excerpt from the Code of Federal Regulation and the basic permit exhibited to me, and further having regard to the correspondence relied on by the defenders in support of their defence of waiver, it appears to me that the strength of the defenders' case is (so far as this can be measured at this stage) at least as great as that of the pursuers.

[38] Taking all of the above factors into considerations I am persuaded that the balance of convenience favours the granting of the interim order sought. However, there remains the issue of innovation. If an order is granted as sought, without any condition, the pursuers will be obliged to supply whisky to the defenders notwithstanding that the sum of £239.882.90 is presently due and resting owing by the defenders to them. This obligation on the pursuers would go beyond what they are obliged to do in terms of the agreement and the parties' subsequent trading relationship. I see no justification for requiring the pursuers to ship whisky to the Untied States and deliver it to the defenders when the defenders are admittedly due and resting owing to them in a significant sum. If the defenders had failed to make payment for whisky previously supplied, as I understand the parties' contractual arrangements the pursuers would have had three remedies available to them: (1) they would have been entitled to decline to supply further whisky to the defenders until all sums due were paid, (2) they would have been entitled to sue the defenders for payment of sums due, and (3) they would have been entitled to serve notice in terms of Clause 3.3(c) of the agreement requiring payment, and if payment was not made within fourteen days they could have terminated the agreement. If an interim order is granted as sought, the pursuers will still have the second and third of these remedies available to them, but they will be deprived of the first. Such a result would arguably be an innovation on the rights and remedies available to the parties under the contract. Such an innovation would be avoided by attaching a condition to the order to the effect that the pursuers are not obliged to accept orders from the defenders until the defenders have made payment to them of the sum sought in the second conclusion of the summons.

[39] I do not consider that there is any force in the argument for the defenders that their concession that they will not seek retention of the sum second sued for if the interim order is granted is something which should be weighed in their favour when assessing the balance of convenience. The right of retention only arises within the context of the present litigation; what I am concerned to achieve is the avoidance of innovation upon the parties' pre-existing contractual rights and remedies. I can see no justification for requiring the pursuers to supply goods to the defenders before they have received payment for outstanding sums due.

[40] In the result, I shall grant the interim order sought in terms of Section 47(2) of the Court of Session Act 1988, but subject to the condition that the order shall not take effect until the defenders have made payment to the pursuers of the sum second concluded for.