Leche Pascual SA v Collin & Hobson Plc

Neutral Citation Number: [2004] EWCA Civ 700 IN THE SUPREME COURT OF JUDICATURE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE HIGH COURT OF JUSTICE QUEEN’S BENCH DIVISION BIRMINGHAM DISTRICT REGISTRY MERCANTILE COURT HER HONOUR JUDGE ALTON Claim No. BM1 4012 Before : LORD JUSTICE POTTER LORD JUSTICE CARNWATH and MR JUSTICE BODEY - - - - - - - - - - - - - - - - - - - - - Between : LECHE PASCUAL SA - and - COLLIN & HOBSON PLC Case No: A3/2003/1950 Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 15 June 2004 Claimant Appellant Defendant Respondent - - - - - - - - - - - - - - - - - - - - - (Transcript of the Handed Down Judgment of Smith Bernal Wordwave Limited, 190 Fleet Street London EC4A 2AG Tel No: 020 7421 4040, Fax No: 020 7831 8838 Official Shorthand Writers to the Court) - - - - - - - - - - - - - - - - - - - - - Alan Boyle QC and Gavin Hamilton (instructed by Clifford Chance) for the Appellant Isabel Hitching (instructed by Hammonds, Birmingham) for the Respondent - - - - - - - - - - - - - - - - - - - - - Judgment Lord Justice Carnwath : Introduction 1. 2. Leche Pascual (“Leche”) is a large Spanish company, which processes dairy products. Collin & Hobson (“Collin”) is an English company which imports and distributes food products. The parties’ trading relationship began in late 1996. Successful business was developed with Leche’s ambient yoghurt, supplied in “multi-packs” (packs of four). The present dispute concerns “single pot yoghurts”. For many years Collin had imported single pot yoghurts from a German manufacturer, under the Campina brand. In 1997 their trading relationship with Campina deteriorated, leading to notice of termination to expire in the spring of 1998. Collin needed to find a new supplier of single pot yoghurt. They found Leche, who agreed to supply single pot yoghurt for a minimum period of one year. In the event, Leche was unable to fulfil its contract, due to problems with the machinery it had bought for that purpose. 3. Following the trial of preliminary issues, the court found that i) in January 1998 the parties entered into a binding agreement in respect of the supply of four types of single pot yoghurt, namely Leche Pascual brand and “Best In” brand (to be sold to the Bestway chain for retail under its own label, also referred to in the judgment as “own brand”), each in low fat and “thick and creamy” ranges; ii) under that agreement Leche was obliged to supply such quantity of single pot yoghurt as Collin from time to time ordered during the contract period; iii) an order was placed and was not fulfilled. Subsequently it was admitted by Leche that it was in breach of contract in failing to meet the order. It was not disputed that Collin wished throughout the contractual period of supply to place further orders for single pot yoghurt but could find no alternative supplier. 4. On 20th August 2003, following a lengthy hearing, HH Judge Alton gave judgment on a number of remaining points. Most are no longer in issue. Relevant to this appeal she decided that: i) Collin was entitled to recover losses calculated by reference to profit on anticipated sales during the whole 12 months of the minimum period of supply, as reasonably foreseeable losses of the failure to supply the first order; ii) the losses should be calculated assuming anticipated sales of 6.5m single pots and 3m single pots, respectively, of Leche Pascual brand and Best In brand, each reduced by 25% to reflect uncertainty and risk. On the basis of those figures, and subject to certain adjustments and with interest, the losses were agreed as £724,353.00. 5. Leche sought permission to appeal on a number of points. On 3rd November 2003 Longmore LJ and Sir Martin Nourse gave permission on two grounds relating to the assessment of damages. The Judge’s conclusions 6. To set the context for the Judge’s findings on those issues it is helpful to set out her conclusion on the issue of liability: “36. I find that (Leche) clearly appreciated (and even if it had not, the reasonable manufacturer/supplier in its position would have appreciated) at the time the contract was made that in the event that it did not produce and supply the single pot yoghurt (both own brand and branded) for onward sale by (Collin), (Collin) would be unable to source that Leche Pascual product from anywhere else.…. It is the fact that there was nowhere, at no time contemporaneous to the breach, any suggestion or assumption that (Collin) should be able, with ease or at all, to identify a suitable alternative source…. 37. It follows, therefore, that I find that (Leche) should, or the reasonable yoghurt producer in (Leche)’s position would, have realised that loss of that market was the probable or sufficiently likely result of the breach of contract by failure to deliver the first order on the basis that no alternative source was available or would be available in time to prevent the loss. 38. In light of the above findings I conclude that (Collin) is entitled, based upon its primary case, to recover losses measured by reference not simply to loss of profit on the specific consignment which was not delivered but loss of profit on the basis that (Collin)’s existing market for single pot yoghurts was, as a consequence of that breach, lost to (Collin)….” 7. 8. The Judge acknowledged the assistance derived from the two expert witnesses on accountancy issues, Mr Hall for Leche and Mr Long for Collin. They had produced a very clear and helpful joint report, which explained the remaining issues and the respective positions of the parties. As the Judge said, the only live issue was the projected volume of sales. In paragraphs 55 to 78 of her judgment she conducted a detailed review of the evidence on this aspect, and in paragraphs 79-80 she reached the conclusion I have indicated. Grounds of appeal 9. The grounds on which permission to appeal was given were in summary: i) The judge approached the assessment of quantum of Collin’s loss of profits in the wrong way. She took their estimate of sales, based on historic sales of Campina products in 1996, instead of starting from an assessment of their sales in April 1998 (i.e. at the time of breach), and making appropriate adjustments. ii) Alternatively, her discount of 25% was insufficient having regard to the uncertainties of the exercise. 10. There are certain subsidiary points, which are relevant to both grounds: i) ii) iii) She failed to take account of an apparent inconsistency of her findings with Collin’s own projections for sales to two supermarket chains, Londis and Nisa (which had been the subject of a separate agreement between the experts); Her assessment of likely sales of Best In products was based on inadequate evidence; She gave too much weight to the evidence relating to the original successful introduction of Leche Pascual multi-pack yoghurt. General approach 11. Leche complains that the Judge wrongly took as her starting point Mr Collin’s own assessment of the likely sales, without regard to later evidence, 12. Mr Collin had based his estimate on the actual Campina sales in 1996, as explained in his third witness statement. Subsequent analysis by Mr Hall for Leche showed that there had been a decline both in the numbers of customers and the overall sales figures for the following two years. The result was that on his estimate the total sales of Campina 125g single pots had fallen from 6.076m in the 12 months to 1996 to 4.367m in the 12 months to 1st April 1998. On the basis of the customers remaining at the date of breach (30th April 1998) he estimated the sales at just over 4 million pots. He assumed a further decline in the following year to 3.6 million pots. That was the basis of his assessment as recorded in the joint report. 13. 14. 15. Leche says that if, as the Judge said, the relevant loss was that of “the existing customer base”, the starting point should have been the evidence of sales, as they were in April 1998 when the breach occurred. We were taken through the sequence of evidence following Mr Collin’s third statement, in which he originally put forward the 6.5million estimate. The implication was that it was inconsistent for him to seek to stand by that estimate when it was shown that the actual sales in the following two years were significantly less. In my view, this analysis does less than justice to the work of the two experts, and to the careful examination of these issues in the judgment. It is true that Mr Collin began from the 1996 figures for Campina sales. As he explained in that witness statement, Campina had not provided sales reports for 1997, as the relationship had by then deteriorated. He referred in general terms to the factors which, in his view, were likely to have depressed sales in that period after 1996, and conversely to factors which would have made the Leche Pascual product more attractive to the market. He regarded his estimate of 6.5 million as “conservative”. Following Mr Hall’s report and his analysis of the actual figures of Campina sales in 1997 and 1998, Mr Collin returned to this subject in a further statement. In that he stood by the estimate of 6.5million as conservative, in the sense that it did not take account of any sales to new customers. He commented in more detail on the reduced level of turnover shown by Mr Hall’s analysis. He thought the reduction would have been due to such matters as continuing quality problems, de-listing of certain products by Campina, and Campina’s pricing policy. In 1997 Collin were in some respects “in a state of limbo”, because it knew the association with Campina was coming to an end but it did not know what could be offered in its place. He also referred to their successful launch of the Leche Pascual multi-pack product, which showed that sales could build up very quickly with a sufficiently attractive product. 16. Mr Long, in his report for Collin, acknowledged the limits of his expertise in relation to some of the relevant factors. However, he reviewed the available evidence, including Mr Hall’s figures and Mr Collin’s comments on them. Having noted that the 6.5 million estimate represented a 35% increase on the actual Campina sales achieved in the previous year, he said: “Given the historical problems with Campina, the superior Leche Pascual product, the success of Leche Pascual multi- pack yoghurt and the access to larger markets, in my opinion the volume of single pot yoghurt estimated in the counter-claim is achievable and reasonable. I would not regard it as over-optimistic or aggressive.” (para 4.67) 17. The joint report listed the factors which the Court was likely to find relevant in determining a reasonable estimate. It noted the limits on the expertise of Mr Hall and Mr Long. It set out their respective positions as to estimates of total sales for the relevant year. Mr Hall’s conclusion was that 3.6 million was “reasonable, if anything overstated” as an overall estimate of sales (for both Leche Pascual branded and Best In own brand) in the year to 30th April 1999. Mr Long’s view was that sales of 6.5m Leche Pascual branded, and 3m Best In own brand, were “reasonable and achievable”. 18. The Judge clearly understood the uncertainties necessarily surrounding the evidence before her. As she said: “58. Inevitably, where the breach consists of non-supply of a specific product and there is no question of reviewing previous sales performance for that identical product the assessment of the volume of prospective sales becomes one of informed guesswork.” 19. She recognised that there was very little independent information as to “the general status of the ambient yoghurt market” and therefore it was necessary to “focus upon (Collin)’s performance as demonstrated in particular by its historical figures.” However, she saw some assistance in the evidence as to the sales of the yoghurt launched in mid-1997, while cautioning herself against “over-heavy reliance” upon such data: “Obviously there would be dangers in over-heavy reliance upon such data as all sorts of factors, including price, may play an important part.” (para 64). She saw that evidence as relevant in considering the ability of Collin to increase its market from the 1998 position. 20. Having reviewed the evidence in relation to that aspect, she said: “65. I accordingly conclude that (Collin)’s market was capable of increasing and, indeed, increasing to a significant extent bearing in mind that as a consequence of the successful sale of Leche Pascual multi-pot, (Collin) was able to achieve an uplift in respect of total ambient yoghurt sales of the order of 130% for the year ending April 1998 as compared with the previous year. Obviously that does not prove that a similar expansion was possible in relation to the single pot once it was introduced the following year; nevertheless it does put into context Mr Hall’s expressed doubt that a similar percentage increase in sales volumes, from a cold start, from 4 million to 9.5 million pots for the single pot was achievable. Of course, the risks of displacement and/or saturation of the market, particularly where the subsequent launch is to be of the same product but simply in single, rather than multiple, packs, must not be ignored nor do I do so.” 21. At paragraph 69 she considered the relevance of the fall in Campina sales, and whether that was attributable to the problems with Campina and might have been reversed using the Leche Pascual product. It is unnecessary to go through those points in detail. It is sufficient to say that the Judge clearly had in mind and specifically considered the rival contentions and the relevant issues, which had been so clearly identified by the joint report. 22. She expressed her conclusion as follows: “79. I have concluded that the estimate of sales of 6.5 million branded product is a realistic commercial estimate of the sales achievable but for (Collin)’s loss of this market as a consequence of (Leche)’s failure to supply. It is plain that (Collin), and (Leche), could reasonably have expected to have more than matched and, indeed, significantly, beaten the historic sales achieved in the immediately preceding year in respect of the Campina brand and that there was sufficient scope within the market - even within (Collin)’s existing customer base - for such expansion to Though the percentage uplift over the take place. immediately preceding year is substantial, there were plainly factors inhibiting the sales of Campina products over the year to April 1998 and significant advantages of Leche Pascual over Campina which gave it better potential performance. If tangible support for achievability is needed, then it is to be found in the multi-pot sales of the same product which would inevitably have given customers the confidence that the product had market appeal and would be saleable in addition to, rather than in substitution for, in whole or part, the Leche Pascual multi-pot. Nevertheless such success can by no means be treated as a racing certainty. 80. It is accordingly appropriate when calculating loss under this head to discount the figure in respect of both own brand and branded sales not only to reflect the risk of erosion in the context of Bestway branded sales but also the risk that the volumes might otherwise not be achieved. I consider that a discount of 25%, the figure adopted by Mr Long in relation to issue 6, would adequately reflect those risks and that losses should therefore be calculated assuming sales volumes of 2.25 million in respect of own brand and 4.875 million branded product.” 23. It is clear therefore that she broadly accepted the evidence of Mr Collin and Mr Long. Her reasons were clearly explained. They were directly related to the way the issues had been presented to her in the joint report. It is impossible in my view to suggest that she gave undue weight to Mr Collin’s evidence on the 1996 figures. They were fairly treated as one aspect of the overall picture. In my view there is no basis for challenging her overall approach. Particular issues 24. One of Collin’s complaints was that as a result of the breach of contract they had lost two important customers, Londis Holdings Ltd (“Londis”) and Nisa-Today’s (Holdings) Ltd (“Nisa”). Estimates had been prepared by Collin’s Finance Director, Mr Robinson, in support of this claim. These were referred to in Mr Long’s report. By the time of the trial they were no longer in dispute. However, they were referred to in the joint experts’ report. It was noted that the figures showed that Collin’s expectation of potential sales to Londis in the year ending 30th April 1999 would have been lower than the actual Campina sales in the year ending 30th April 1998, and that the sales to Nisa would have been only marginally higher in that year; although the projections assumed growth of 30% in both cases for the following year. The joint report commented: “Mr Hall believes that this projection appears to be at odds with the defendant’s assumption that significant growth could have been achieved in the volume of Leche Pascual single pot yoghurt sold in the year ending 30th April 1999 as compared with the previous track record of sales of Campina single pot yoghurt, with no time lags.” As to Mr Long, it recorded: “Mr Long draws no particular conclusions from this matter other than that some differences have arisen due to the estimating process supplied by the defendant, hence the Londis and Nisa projected sales of single pot Leche Pascual yoghurt appears conservative in the context of the total projected sales.” (para 44 to 48). The list of issues presented to the court by the experts includes as one of the relevant issues: “The defendant’s expectation of the volume of sales of single pot yoghurt to Londis and Nisa as reflected in … Mr Long’s report.” 25. Mr Boyle complains that this apparent discrepancy was not addressed in terms by the Judge in her reasons. However, he was unable to refer us to any part of the cross-examination of the Collin witnesses, or the final submissions on behalf of Leche, which drew her attention to it as a material issue. In those circumstances, I do not see how the Judge can be criticised for not treating it as an issue requiring specific treatment in her judgment. 26. 27. The second particular issue concerns the treatment of Best In products. Mr Boyle suggests that this part of the estimate was particularly uncertain. The assumption was that Collin would be buying not merely Leche Pascual single pots in place of those supplied by Campina, but in addition would be providing Best In with its own brand yoghurt. This was in effect a new market, and there was no reliable evidence as to how the two lines would compete with each other. Furthermore there was no direct oral evidence on this aspect. In his evidence Mr Collin relied on his discussions with Bestway who had indicated that their expected volumes would be 1.5 million pots of each type, making a total of 3 million. These figures had been given to Mr Roessink, who was negotiating on behalf of Leche, at a meeting in January 1998 and confirmed in writing. In paragraph 77, the Judge commented on this part of the case. She noted that Bestway had been intent on developing a significant own brand range of basic products. She continued: “The estimate made at the time the contract was entered into was that there would be sales of some 3 million pots per annum, being 1.5 million each of low-fat and thick and creamy on top of sales of the branded product. These figures sound large. In reality, however, it would represent a monthly sale of 125,000 pots of each fat type, that is approximately 30,000 of each, per flavour per month, from a significant number of depots spread countrywide. It was a contemporaneous estimate put forward by Bestway and accepted as apparently feasible and achievable by both the Defendant and the Claimant at the time, to be fair, Mr Roessink did indicate in evidence that he was dependent upon the assessment of others as to the potential, the Claimant having had at that stage no real experience of the UK market. I have no doubt that the estimate represented what both Bestway and Mr Collin believe was realistically achievable. Having regard to the Bestway business, their policy in relation to own brand and the like, there was no reason to consider that the estimate was unreasonable based otherwise on sound commercial judgment by those who knew their market albeit there must obviously have been a risk that results would not match expectations.” She also considered and rejected Mr Hall’s suggestion that for every sale of the own brand product there would be an equal reduction in sales of the branded product (para 78). 28. Mr Boyle suggests that this passage places too much reliance on what was in effect hearsay evidence from Bestway. In my view that misrepresents it. As the Judge said, her conclusion was based on a commercial estimate made at the time specifically for the purpose of entering into the contract. It was agreed by both parties as realistic and that view was supported by the other considerations to which the Judge referred. She also made a 25% deduction to represent the risk involved. Mr Boyle submits that the discount should have been 33⅓%, but is unable to offer any more rational basis for proposing that figure. I see no error of approach in the Judge’s reasoning. 29. Lastly under this head Mr Boyle submits that the Judge placed too much reliance on the success of the multi-pack launch. He refers to Mr Hall’s analysis of the relative prices of the Leche Pascual and Campina multi-packs (2nd report para 3.5.12ff). He estimated that the Leche Pascual product was 20% cheaper per pot than the Campina product. He considered it “reasonable to assume” that the price advantage of the Leche Pascual product would have been “a highly significant factor in contributing to the successful launch of this product compared to the existing track record of the Campina multi-packs.” The relevance of the successful launch of the multi-pack products was clearly a significant issue at the hearing. It had been identified as such by the experts in their joint report. The Judge recognised (in para 64 – see above) that “all sorts of factors, including price” might play a part in such a launch. With that qualification, she was clearly entitled, particularly having regard to the limited availability of other indicators, to treat this as a significant factor. Although she might have dealt with this point in more detail, I cannot see that her failure to do so undermines her overall conclusions. The 25% deduction 30. As I have noted, a separate ground of appeal related to the overall deduction of 25% for risk. In the event Mr Boyle made it clear that this was in effect an alternative way of putting the more detailed points to which I have already referred. As he submits, even if the individual points do not in themselves provide grounds for questioning the Judge’s reasoning, cumulatively they should be treated as indicating the degree of uncertainty in the overall calculations which should have been reflected in a higher final discount. However, any such deduction is inevitably an arbitrary exercise, based on overall judgment. I see no reason to interfere with the Judge’s assessment. Conclusion 31. I can readily understand and sympathise with Leche’s frustration that their breach of contract, caused apparently by circumstances out of their control, had resulted in losses of this order. It may seem particularly galling that the losses are inflated by the acknowledged attractions of the Leche Pascual product, as compared with its predecessor. However, the breach of contract is not in issue. Although particular points can be made about aspects of the Judge’s reasoning, overall it was in my view a very careful and fully reasoned assessment in relation to what, as she acknowledged, must be a speculative exercise. 32. For these reasons I would dismiss this appeal. Mr Justice Bodey 33. I agree. Lord Justice Potter 34. I also agree. Order: Appeal dismissed. (Order does not form part of the approved judgment)