Gallaher International Ltd v Tlais Enterprises Ltd (Rev 1), Court of Appeal - Commercial Court, April 18, 2008, [2008] EWHC 804 (Comm)

Resolution Date:April 18, 2008
Issuing Organization:Commercial Court
Actores:Gallaher International Ltd v Tlais Enterprises Ltd (Rev 1)
 
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Neutral Citation Number: [2008] EWHC 804 (Comm)

Case No: 2005 FOLIO 185

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 18/04/2008

Before:

MR JUSTICE CHRISTOPHER CLARKE

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Between:

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Mr Lawrence Rabinowitz QC, Mr Daniel Toledano & Mr Simon Colton (instructed by Slaughter & May, Solicitors, London) for the Claimant

Mr Richard Hill, Mr Alastair Tomson & Mr Adam Holliman (instructed by Picton Howell, Solicitors, London) for the Defendant

Hearing dates:

23rd - 24th April, 2nd -3rd May, 8th -10th May, 14th - 15th May, 21st - 25th May,

5th - 8th June, 11th - 15th June, 18th - 22nd June, 26th - 28th June, 4th - 5th July,

9th - 12th July, 16th - 19th July, 24th - 27th July, 30th - 31st July, 1st August,

8th - 9th October, 15th - 17th October, 28th - 29th November 2007.

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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

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MR JUSTICE CHRISTOPHER CLARKE

MR JUSTICE CHRISTOPHER CLARKE

Overview

The main action

1 In the first of these two actions Gallaher International Ltd claims that by a letter dated 4th March 2005 it lawfully terminated a distribution agreement between it and Tlais Enterprises Limited (``TEL'') whereby TEL was appointed as Gallaher's distributor in respect of certain specified brands of cigarettes. TEL disputes that the TEL Agreement was lawfully terminated and counterclaims over $ 675 million by way of damages. In the second action Gallaher claims against Mr Ptolomeos Tlais, one of the beneficial owners of TEL, under a personal guarantee. In this judgment I use ``Gallaher'' primarily to refer to the claimant; but, on occasion, to refer generically to the Gallaher group.

2 The distribution agreement (``the TEL Agreement'') commenced on 1st May 2002. Prior thereto Gallaher supplied cigarettes on the orders of companies owned or controlled by a Mr Charles Hadkinson, particularly Namelex Holdings Ltd (formerly Namelex Ltd). I refer to this company as ``Namelex''. A large proportion of those orders were financed by the Tlais family. From June 2000 Gallaher had had a distribution agreement (``the Namelex Agreement'') with a company called Namelex Trading Agencies Ltd, of which Mr Hadkinson and Mr Tlais were beneficial joint (50/50) owners.

3 Mr Hadkinson had a number of associates, including a Mr Fadi Nammour, a Lebanese citizen whose family had interests in banking and a Mr Michael Clarke, who later became an employee of TEL.

4 The Namelex Agreement was terminated in circumstances where (a) JL Spirits and Tobacco, a company associated with Namelex, was a substantial debtor to Gallaher; (b) a large quantity of cigarettes had been manufactured for Namelex by Gallaher many of which had been shipped to Cyprus and Dubai, whilst other quantities remained in the UK; and (c) Mr Tlais claimed to have been given assurances by Mr Hadkinson as to the level of support that Gallaher would provide in the form of free cigarettes which had not been fulfilled, as a result of which he claimed to have suffered severe losses.

5 It is common ground that Mr Hadkinson, who had been employed by Gallaher for three years in the 1980s, was a rogue, but, so far as the parties are concerned, for different reasons. Gallaher so describe him because he strung them along with promises of letters of credit that never materialised; Mr Tlais because he made false representations to him about the support that he was to receive from Gallaher.

6 Under the TEL Agreement Gallaher appointed TEL as its exclusive distributor in 15 Territories in the Middle East, Africa and Latin America (``the Territories'') in respect of the Sovereign, Dorchester and Stateline brands of cigarettes (``the Brands'').

7 Each party had the right to terminate the TEL Agreement forthwith at any time on written notice if the other party committed a material breach of any of its terms and conditions; provided that, in the case of a remediable breach, no such notice could be given unless and until a notice had been served specifying the breach and requiring it to be remedied and 30 days had elapsed without it being remedied. The body of the TEL Agreement also provided, by clause 10 (1), that each party was entitled to terminate the TEL Agreement on 3 months' written notice to expire on, or at any time after, 1st May 2007. There is a dispute as to whether the parties effectively agreed an automatic renewal, subject to certain conditions, for a further period of five years until May 2012.

8 The TEL Agreement, as amended in January 2003, provided that all brands sold by Gallaher to TEL under the TEL Agreement were intended for final sale via distributors to consumers in the Territories: clause 2 (v). Under the TEL Agreement TEL was subject to a number of obligations designed to ensure that that intention was fulfilled and that cigarettes supplied under the TEL Agreement were not smuggled out of the Territories into other markets, including the United Kingdom. Among these was an obligation on TEL to conduct its business in accordance with the Policy on International Trade of the Gallaher Group (the ``ITP''). TEL was also obliged to procure that any sub-distributors conducted business in accordance with the ITP: clause 4 (xxi).

9 In addition the TEL Agreement required TEL to keep ``full, proper and accurate accounts and records showing clearly all sales transactions and inventories relating to the Brands'': clause 4 (viii).

10 Goods manufactured for TEL after May 2002 were, in accordance with clause 3 (ii) of the TEL Agreement, marked by Gallaher with unique pack codes which enabled them to be tracked and traced. A substantial proportion of the goods supplied by Gallaher to TEL were seized by Her Majesty's Customs and Excise (``HMCE'') Now Her Majesty's Revenue and Customs. I shall refer to them by the acronym (HMCE) that they had at the time of the relevant events. or other Customs authorities.

11 According to Gallaher the volume of seizures notified by HMCE and other customs authorities in terms of individual cigarettes (``sticks'') during 2002 to 2006 was at least in the region of the following figures (the stock in the third column being inclusive of the stock in the second):

12 The number of cigarettes seized by Customs authorities is only a small proportion of those smuggled. In ``Measuring and Tackling Indirect Tax Losses - 2004'' HMCE set out its total seizures over a period of years and its estimate of the volume of cigarettes successfully smuggled in those years. It is possible from that data to estimate the percentage of seizures to total smuggled product as follows:

13 These percentages are consistent with a specific calculation contained in the `Comptroller and Auditor General's Standard Report on the Accounts of HM Customs and Excise 2004-05', published 7th October 2005 which states that ``Over that period [2000-04] HMRC believed it had continued to successfully intercept a broadly consistent proportion (around 14.75 per cent) of smuggled cigarettes''.

14 Since the quantity of goods successfully smuggled can never be known, these estimates must, at best, be broad ones. But they indicate that, in overall terms, it is necessary to multiply the volume of goods seized by about 7 to arrive at the likely volume of smuggled goods. If that factor is applied to the TEL seizures the resultant product implies that virtually all, or, at any rate a very substantial majority of the TEL coded goods sold to TEL that were not destroyed were smuggled.

15 Gallaher set out and described the breaches that it relied on in its written notice of termination of 4th March 2005, which it served on TEL on the same day as it commenced the main action. In essence Gallaher relies, firstly, on TEL's failure to prevent smuggling of cigarettes into the UK and TEL's alleged complicity in smuggling. It contends that the volume of seizures over a five year period, despite repeated warnings by Gallaher of increasing concern on the part of HMCE and itself and a ``red card'' (see paragraph 172 below) from HMCE in respect of TEL in January 2005, could not have arisen without breaches on the part of TEL of various obligations under the TEL Agreement. Gallaher relies in this respect on certain schedules of sales made by Adam Trading, TEL's master distributor, between 2002 and 2005, (the ``Adam Trading Schedules'') which showed sales to a number of destinations outside the Territories.

16 Gallaher also relies on TEL's failure to keep adequate accounts and records. TEL accepts that it did not keep any accounts during the period of the TEL Agreement (save for one set from 1st November 2002 to 31st December 2003 which manifestly fails to record TEL's level of trading). In order to support its claim for very large damages TEL has had to reconstruct accounts for the entire period. Gallaher say that the reconstruction is flawed, that the problems thrown up by the exercise are the very type of problem that the clause was designed to prevent, and that the failure to keep proper records affords an independent ground of termination.

17 Gallaher also relies on alleged breaches by TEL of, inter alia, its obligations under the TEL Agreement (a) to supply evidence of shipment of Brands to the appropriate Territory, (b) to sell the Brands in amounts commensurate with the estimated demand in the intended markets within the Territories, (c) not to resell the Brands to any person whom it knew or had reason to believe was engaged in any illegal trade in cigarettes and (d) to resell them only to persons where there was no reasonable cause to believed that such persons would sell them outside the...

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