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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Total Spares & Supplies Ltd & Anor v Antares SRL & Ors [2004] EWHC 2626 (Ch) (16 November 2004) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2004/2626.html Cite as: [2004] EWHC 2626 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/11/2004

Mr Justice David Richards :

Introduction

1. This case concerns a franchise agreement made on 26 October 1998 between Antares Srl (Srl) and Antares Limited (Limited), which were then under common control. In November 2001 Limited was purchased by Total Spares & Supplies Limited (TSS), which had no previous connection with Srl.
2. In September 2002 Srl gave written notice of immediate termination of the franchise agreement. Srl contends that it was entitled to do so on the basis of a number of breaches of the agreement. Limited denies that it was in breach of the agreement or that Srl was entitled to give notice of termination. Limited refused to treat the agreement as at an end and on 18 October 2002 obtained an interim injunction restraining Srl from acting in breach of the agreement. On 5 December 2002 Srl gave further notice of termination, without prejudice to the earlier notice, relying on further breaches of the agreement. Limited denies the alleged further breaches of the agreement. On 11 December 2002 Limited treated the second notice of termination as a repudiatory breach of the agreement and accepted it. It is therefore common ground that the agreement was terminated, at the latest on 11 December 2002.
3. The principal issues are as follows. First, did Limited commit any of the breaches of the franchise agreement on which Srl relies for the first notice of termination and, if so, whether those breaches entitled it to give the notice of termination. Secondly, was Limited in further breach of the agreement as alleged by Srl in support of its second notice of termination and, if so, did those further breaches entitle Srl to give notice of termination. Thirdly there are issues of damages. Srl has claims for relatively small sums arising out of the breaches of the agreement alleged against Limited. Limited has a rather larger claim for damages against Srl for loss of profits arising from the termination of the agreement. No claim is now made by TSS
4. The second defendant, European Plumb Direct Limited (EPD), was appointed franchisee in the United Kingdom in place of Limited in September 2002. It is now owned by Srl and has at all times been at least closely associated with Srl. It is the claimants' case that it was from the start owned or controlled by Srl. As originally pleaded, an injunction was sought against EPD. With Limited's acceptance that the agreement had been terminated, an injunction was no longer sought. I was told by counsel for Limited that it was not pursuing a pleaded case for passing-off against EPD and, as I understand it, no other claim is now made against EPD. The third defendant, Barclays Bank plc, provided a guarantee of TSS's obligations under the contract to purchase Limited. No claim is now made against Barclays, which has played no part in the proceedings.
5. Each side called a considerable number of witnesses. The most significant were Mr Francesco Gargani for Srl and Mr Christopher Kirby and Mr Roberto Strafino for Limited, although other witnesses gave important evidence on certain topics. Strong attacks were made on the credibility of Mr Gargani and Mr Kirby and the truthfulness of the evidence of other witnesses was in various respects challenged. A wide variety of issues was examined in the evidence but I intend to confine my findings in the main to matters which are material to the issues in this case. As will become apparent, I am unable to accept all the evidence given by any of the witnesses mentioned above, and have also rejected evidence given by some of the other witnesses.

Background

6. Srl is an Italian company based in Lucca. It is controlled by Mr Francesco Gargani who manages its business and indirectly owns a majority of its shares. Mr Gargani is not formally a director of Srl. His wife, Dr Enrica Mattolini, is a director and is the official representative of Srl required by Italian company law.
7. The business of Srl is the sale of heating and plumbing components and spare parts to installers and retailers under the trade name Antares. Its only mode of sale is by catalogue, which is widely distributed throughout Europe. The components and parts sold by it are sourced from all over the world and warehoused at Lucca. Products are sent directly from Lucca to the customer. The main selling point is that the prices are significantly lower than those of other suppliers.
8. Srl operates principally through franchisees and agencies and it has franchise agreements with companies in a number of different European countries, although most are under common control with Srl. The network covers 11 countries. Typically the franchisee or agency will have a small office in the country for which it holds the franchise or agency and local telephone and fax lines. Customers calling those numbers will be either dealt with locally or, in most cases, automatically put right through to Srl's offices in Lucca where their calls will be handled by staff who are fluent in the relevant language. If there is a franchise operation, the products are sold by Srl to the local franchisee and sold on, at a profit, by the franchisee to the customer. However, it is Srl which prepares invoices in the name of the franchisee and dispatches the goods and invoices directly to the customers. No products are stored by the franchisees. To reduce costs and increase efficiency, Srl has developed a software system for the placing and processing of orders. Franchisees are required to place orders by an internet link, which enables them to check availability, and the system deals with all administrative aspects of the order, production of invoices, stock management, transport organisation and accounting.
9. When Limited was established as the franchisee for the United Kingdom, it took a small office at 12-17 Upper Bridge Street, Canterbury. Although the business could be run from that office, it was normally run from Lucca. What are called lo-call telephone and fax numbers were taken in the name of Srl. Callers to those numbers would pay only at the local rate and the charges for the automatic diversions to numbers in Canterbury or Lucca would be paid by Srl and reimbursed by Limited. Catalogues were printed in English and distributed in the UK under Limited's name, with the lo-call numbers and address in Canterbury given as the contact points. Limited itself was owned by Mr Gargani from September 1998 to September 2001 when he transferred his shares to Idalgo Limited, a company incorporated in Liechtenstein, as part of his tax planning before the sale of Limited to TSS in November 2001.
10. Srl received a number of approaches from prospective franchisees for the UK. In early 2001, an approach was received from TSS. The principal business of TSS was the wholesale supply and distribution of plumbing parts. TSS was owned by a company called Palmer Holdings Limited (Palmer). Palmer is incorporated in Gibraltar and its share capital is owned by a Gibraltar-based trust. The principal witness for Limited and TSS was Christopher Kirby. Mr Kirby was sensitive in his evidence as to his precise relationship with TSS and Palmer. For the purposes of this judgment, it is enough to say that on all the evidence I am satisfied that, whatever the precise legal position, Mr Kirby in fact controlled all aspects of TSS and its business and, following the acquisition of Limited, in fact controlled that company as well. TSS went into insolvent liquidation in July 2002 due to its trading losses.

The acquisition of Limited by TSS

11. Mr Kirby was familiar with the Antares brand name and in early 2001 instructed Stephen Bloomfield, the sales director of TSS, to contact Limited. Mr Bloomfield spoke by telephone to Sonia Ercolini, Mr Gargani's personal assistant at Lucca, and wrote on 20 January 2001 formally expressing interest on behalf of TSS in becoming an Antares franchisee. Mr Gargani replied on 30 January 2001, enclosing a confidentiality agreement (in English) which was signed and returned by Mr Bloomfield, an "Agreement of Intents" (in English), a draft franchise agreement and the international price list in euros. There is an issue on the evidence as to whether the copy of the draft franchise agreement was in English or in Italian. The franchise agreement as signed by Srl and Limited was in Italian but Mr Kirby and Mr Bloomfield say that they were supplied with an English translation. For reasons which will become apparent, nothing turns on this point but I find that the document supplied was an English translation. Mr Gargani and Miss Ercolini explained that the documents were a standard pack sent to people interested in acquiring the franchise in the UK.
12. In early February 2001 Mr Kirby and Atul Amin, a director of TSS, met Mr Gargani in Lucca. This was followed by a meeting at TSS's offices in Crayford on 27 February 2001, attended by Mr Gargani, Dr Mattolini and Miss Ercolini from Srl and Mr Kirby, Mr Bloomfield and Mr Amin for Limited. There was a good deal of written and oral evidence concerning these meetings. However, in the end, they have little if any impact on the issues in the case. An agreement in English, presented by Mr Kirby, was signed on 27 February 2001. Mr Kirby describes it as a preliminary agreement which really amounted to heads of terms. It provided for the purchase of Limited by TSS for £40,000 payable to Idalgo Limited as seller and for the payment of £210,000 to Srl in consideration for its consent under the franchise agreement to the change of control of Limited. It also provided that TSS would enter into a franchise agreement with Srl in the form attached to the heads of agreement. It is, however, common ground that no such draft agreement was either attached to the heads of agreement or even prepared.
13. Negotiations between the parties continued for some months, mostly directed to the form of guarantee to be provided for the obligations of TSS under the sale and purchase agreement. In a letter dated 16 May 2001 Srl proposed that Limited, not TSS, should enter into a new franchise agreement whereupon the existing franchise agreement would be terminated. Towards the end of June 2001 Srl's solicitors supplied a draft share sale agreement to Limited. It was designed to supersede the heads of agreement signed on 27 February 2001 and it became the focus of negotiations between the parties' solicitors. In contrast to the earlier agreement and negotiations, it assumed that the existing franchise agreement dated 26 October 1998 between Srl and Limited would continue in force and did not provide for a new franchise agreement with Limited or TSS.
14. Delays and difficulties continued, but on 19 November 2001 the share sale agreement was signed on behalf of each party, that is Idalgo Limited as seller, TSS as purchaser and Srl as franchisor consenting to the sale. The amounts payable by TSS remained as before: £40,000 for the shares of Limited, of which £15,000 had already been paid and the balance of £25,000 was paid on completion, and £210,000 for Srl's consent to the sale of Limited, payable as to £35,000 on completion and as to the balance by five instalments of £35,000 each at six-monthly intervals with the first on 30 June 2002 and the last on 30 June 2004. The agreement expressly provided for the transfer of the shares of Limited to be "in favour of TSS's nominee or as it might direct. The shares were in fact transferred to Palmer. Mr Kirby has maintained in these proceedings that TSS made the agreement as nominee for Palmer, but having regard to correspondence in 2001, the terms of the share sale agreement and the explanations which Mr Kirby sought to give in his evidence, I am satisfied that this assertion is wrong. As TSS is in insolvent liquidation, it would now be an advantage to Palmer if it, rather than TSS, were the beneficial owner of Limited.
15. A copy of the franchise agreement dated 26 October 1998 was annexed as a schedule to the share sale agreement, and recital (B) states that:

"The Purchaser also wishes to continue to distribute Antares Products (as defined in this Agreement) through the Company and to benefit from the franchise agreement (as defined in this Agreement)".

Clause 2.1 of the share sale agreement provides that:

"The Purchaser covenants with the Vendor and Franchisor that it shall procure that the Company be bound by and comply with all the terms and conditions of the franchise agreement (as the same may be amended from time to time)."

There is no suggestion of any amendment to the franchise agreement in the share sale agreement, which contains an entire agreement clause (clause 7). Clause 7 provides that the share sale agreement represents (together with the documents referred to in it) the entire agreement between the parties in relation to the matters dealt with in it and that each party acknowledges that in entering into the agreement it has not relied on any representation or warranty save as expressly set out in the agreement or documents referred to in it.

16. I mention these points because it initially formed part of the claimants' case that various undertakings and representations had been made as regards the franchise agreement during the discussions in February 2001, which bound Srl by way of estoppel. One relied on by Mr Kirby in his evidence, but not pleaded, was that Srl agreed to the transfer of the 0845 telephone and fax numbers from its name to the name of TSS or Limited. A second, which is pleaded, is that the franchise agreement granted a sole and exclusive right to Limited to sell Antares products in the UK. I will consider later whether this is in any case the effect of the franchise agreement, but for a number of reasons it was not open to either claimant to rely on these alleged statements as a basis for a claim. First, if any relevant statements were made, it was in the context of negotiations for a different deal which would involve the grant of a new franchise agreement. Secondly, Limited was not a party to these negotiations, but was and remained bound by and entitled to the rights and obligations contained in the franchise agreement, which was not varied. Thirdly, if the alleged statements were made, it would be TSS, not Limited, that could advance a claim. However, it had entered into the share sale agreement with the entire agreement clause and by the time of the trial the claim form and particulars of claim had been amended to delete any claim by TSS. In his closing speech, Mr Peter Ralls QC for Limited and TSS accepted that no claim (including in particular a declaration of estoppel in paragraph (1) of the relief claimed in the re-amended particulars of claim) was made by either party based on these alleged statements

Events following the acquisition of Limited by TSS

17. Following completion of the share sale agreement, Roberto Strafino was appointed as managing director of Limited and Martin Dawkins as a director and the secretary. Mr Strafino had worked for 15 years in the plumbing industry, dealing with supplies of spare parts. His first language is English but he also speaks a number of languages, including fluent Italian. He was to be in day to day charge of Limited's business, although subject, as I find, to Mr Kirby's control. Mr Dawkins was primarily concerned with IT matters.
18. One of Mr Strafino's first acts was to write to BT to arrange the transfer of the lo-call telephone and fax numbers from Srl into Limited's name. Serious issues of fact have developed in relation to subsequent dealings with these numbers. I will deal with them later in this judgment when I consider the issue of alleged nuisance calls in the autumn of 2002, which is one of the grounds relied on by Srl for its second notice of termination, in December 2002.
19. There were early misunderstandings between Mr Gargani and others at Srl on the one hand and Mr Kirby and Mr Strafino. These concerned a transfer of funds out of Limited's bank account and a bounced cheque, and also ownership of a laptop computer. Although dealt with in the evidence, they have no bearing on the issues in the case, except as contributions to the atmosphere of mutual suspicion which was to grow between the parties.
20. Limited, under its new control, continued to operate the franchise. Its office was moved to premises at 119 Springbank Road, Hither Green, London, owned by Mr Kirby. Calls to the lo-call numbers were diverted to numbers at that address. The telephone calls were handled there by a company called JI Services Limited (JI Services). JI Services was run by Mrs Jackie Beedell and she and her husband were the registered holder of its two issued shares. It employed a small number of telephone operators and provided call centre services to a number of businesses. Mrs Beedell's services to JI Services were provided by another company called CRHS Limited. She was a director of CRHS Limited which was in large part owned by Palmer Holdings. She agreed in evidence that she had worked for Mr Kirby and his companies for about 20 years and became a director of CRHS Limited at his request. In an early witness statement in these proceedings, Mr Kirby described Mrs Beedell as his assistant. In the same statement he described JI Services as "a company controlled by me" and I am satisfied that he did control it. JI Services went into insolvent liquidation in May 2002 but Mrs Beedell continued to work at the Springbank Road office, helping with the administration of Limited's business. Calls were diverted to the larger call centre run by CRHS Limited at its offices in Crayford.

Outline chronology: 2002

21. At this stage I will set out an outline chronology of events in 2002. As will appear, it is Srl's case that it was during the period January to March 2002 that the matters on which Srl relies as grounds for its first notice of termination in September 2002 first occurred.
22. A meeting was held at Srl's offices in Lucca on 22 January 2002, attended by Mr Gargani, Mrs Ercolini, Mr Kirby and Mr Strafino. An agenda for the meeting prepared by Srl listed the issues which it wished to discuss, including "new catalogue to be sent out urgently–confirmation of prices for publishing", "promotional", "direct/indirect clients" and "address database, maintenance and up-date". In a letter dated 23 January and faxed to Mr Kirby and Mr Strafino on 25 January, Mr Gargani set out his understanding of the matters agreed at the meeting. This included, in particular, agreement on steps with a view to the urgent preparation of a new English catalogue and agreement that Mr Kirby would provide TSS's customer address list. There was to be significant correspondence and disagreement on these questions over the following two months which I address in detail later in this judgment.
23. Mr Kirby and Mr Strafino were in favour of a pricing policy involving significant price increases on some items and the extensive use of discounts. They made it clear that they intended to adopt this policy. Mr Gargani was strongly opposed to such a policy and set out his views in a letter dated 31 January 2002, albeit in terms which accepted that the final decision rested with Limited.
24. On 21/22 February 2002 Mr Stefano Carmignani and Mrs Ercolini visited Limited's offices in London in order to inspect the way in which the business was being conducted. Mrs Ercolini acted as interpreter for Mr Carmignani who was employed by Srl and whose principal responsibilities included monitoring procedures. On 28 February 2002 Mr Gargani sent a series of letters to Limited, dealing with a variety of issues on which he had complaints against Limited, including the failure to provide a revised customer list, points on the proposed new catalogue, the provision of a budget, and irregularities said to have been found by Mr Carmignani and Mrs Ercolini during their inspection of Limited's operation and systems. Mr Strafino replied on behalf of Limited in a letter dated 1 March.
25. A major trade fair was held in Milan on 5-7 March 2002. Mr Gargani was present at the Antares stand. Mr Kirby and Mr Strafino also attended the fair but at a stand taken by a company called Omnitron Limited. I have no doubt that Mr Gargani was surprised to see them representing Omnitron rather than supporting Antares and that it was one of a number of factors which contributed to the breakdown of the relationship between Mr Gargani and Mr Kirby. I will deal later with Srl's case that Mr Kirby's involvement with Omnitron constituted competition in breach of the franchise agreement.
26. Following further correspondence in relation to the catalogue and customer lists, Mr Gargani wrote on 14 March 2002 again raising the issue of price increases which he considered to be too high, but again in terms which recognised that ultimately the decision on prices was a matter for Limited. This and the other issues generated further correspondence in the second half of March.
27. Mr Gargani and Dr Mattolini gave evidence that by the end of March 2002 Mr Gargani felt that relations with Limited were unmanageable and that the relationship with Limited could not go on as it was. It was against this background that steps to establish EPD commenced at the end of March, although it was not ready to start business until about August. I will deal separately with the circumstances in which EPD was established. Mr Gargani was confirmed in his view of the relationship with Limited and Mr Kirby by the terms of a letter dated 9 April 2002 from Limited, including in particular a paragraph which he regarded as contrary to a fundamental part of the franchise agreement:

"The marketing of Antares Limited is the responsibility of ourselves, although we listen to your years of experience and advice ultimately we will decide when catalogues are printed, distributed and in what quantities. Catalogues and any other marketing activity we undertake will incorporate all the correct logos to give Antares a strong corporate image in the UK market."

28. Little of significance occurred between Srl and Limited until July 2002. Limited continued to operate as a franchisee, but Srl's letters of complaint stopped in mid-April 2002. On 8 July Mr Kirby wrote to Srl complaining of a lack of response to calls and letters from Limited and stating that it was obvious that there was a problem. I am not aware of any response to this letter until 12 August 2002. Mr Strafino left Limited's employment on about 19 July 2002 and shortly afterwards set up his own company with the name Boiler Spares Direct Limited. TSS went into insolvent liquidation on 24 July 2002. On 26 July 2002 Srl wrote to Limited with complaints and referred back to previous letters sent in January to March 2002. Further letters of complaint followed on 5, 12 and 14 August 2002.
29. By a letter dated 13 September 2002, and sent on 14 September, Srl purported to terminate the franchise agreement pursuant to clause 8, but without specifying any grounds for the termination. Minutes of meetings of the board of Srl stated to have been held on 11 September, authorising the termination of the franchise agreement, and on 13 September, appointing EPD as franchisee, have been produced in evidence but are challenged by the claimants. The allegation was made by Mr Kirby in his witness statement, and put by Mr Ralls in cross-examination to Dr Mattolini, that the minutes had been manufactured for the purposes of the litigation and were put forward in an attempt to mislead the court. I am satisfied that the impression sought to be given by the minutes of a genuine discussion of whether to terminate the franchise agreement and as to a real search for a replacement leading to the identification and choice of EPD is false. These decisions were in substance made by Mr Gargani whose plan for some time had been to replace Limited with EPD. However, having heard Dr Mattolini's evidence, I do not accept the further allegation that the minutes were simply fabricated for the purpose of this litigation. It is commonplace with companies that for the sake of formality minutes of meetings are drawn to record decisions and on balance I conclude that these are minutes of that type.
30. Srl's letter was received by Limited on 20 September 2002 but in the meantime, by 16 September, Srl had effectively ceased dealing with Limited. It terminated the computer link and it arranged for calls to the lo-call numbers to be diverted to Srl in Italy. The effect was that Limited ceased to be able to carry on business. Letters were sent by solicitors acting for Limited to Srl's solicitors. There also started a mass of silent or nuisance calls to the lo-call numbers and later to Srl's own numbers in Italy. I shall consider the facts and issues relating to these calls later in the judgment.
31. The claimants issued the claim form in these proceedings on 27 September 2002, having on the previous day obtained an injunction without notice against Barclays Bank. The injunction restrained any payment under the guarantee of TSS's obligations under the share purchase agreement. As previously mentioned, there is no longer any live issue between the claimants and Barclays Bank.
32. On 11 October 2002 the claimants' solicitors served an application notice for 18 October, seeking injunctions against Srl and EPD to restrain them from interfering with Limited's business under the franchise agreement.
33. The evidence in support, comprising witness statements of Mr Kirby and a partner in the claimants' solicitors, stated that they considered Srl to be in breach of the terms of the franchising agreement. The application came before Park J on 18 October 2002. The defendants sought more time to prepare evidence in answer. An adjournment was refused and an order was made restraining Srl and EPD from acting in breach of the franchise agreement, in particular by using the lo-call numbers, distributing or using Limited's catalogue, informing customers that EPD was Srl's "only franchisee in the United Kingdom" or directing business away from Limited.
34. It is common ground that (a) if Srl wrongfully terminated the franchise agreement by its letter 13 September 2002, the purported termination and subsequent conduct of Srl in terminating the computer links and diverting the lo-call numbers amounted to a repudiatory breach of the agreement, and (b) that by seeking and obtaining the injunction granted on 18 October 2002 Limited affirmed the agreement and waived its right to accept the existing breaches as repudiatory and to terminate the agreement.
35. By a letter dated 21 October 2002 to Limited and its solicitors, Srl informed them of its wish to comply with Park J's order, while reserving its position on jurisdiction issues which in the event have not been pursued. I will consider later the terms of this letter because Limited submits that on account of both the conditions contained in it and Srl's stated intention to maintain EPD as a franchisee, although not as its only franchisee, future performance of the franchise agreement by Limited was rendered impossible. Whatever the reason, it is common ground that Limited did not resume performance of the franchise agreement or carry on any significant business as an Antares franchisee.
36. At the beginning of November 2002 Srl changed its solicitors and on 15 November its defence was served. As the claimants have stressed, this was the first occasion on which Srl set out any grounds for the termination of the franchise agreement. They submit that this shows that Srl decided for its own commercial reasons to terminate the agreement and only much later looked around for grounds which they could put forward by way of justification. While it is clearly the case, and accepted by Srl, that it had been examining all aspects of Limited's performance of the agreement in order to identify breaches and some of these were later pleaded by way of amendment of the defence, it is also right to say that many of the pleaded breaches had been advanced by Srl as matters of complaint in correspondence in January to March and later in July and August 2002.
37. Correspondence from Srl's new solicitors, as well as Mr Gargani's witness statements for the trial, show great dissatisfaction on Srl's part with what it sees as the failure of its previous solicitors to advance the essential features of its defence in good time. The court must examine the alleged grounds for termination on their merits, and I am not prepared to infer simply from the failure to put forward any grounds until 15 November 2002 that they are known by Srl to be spurious.
38. On 5 December 2002, Srl served a further notice of termination of the franchise agreement on Limited, expressed to be without prejudice to the validity of the notice served in September. It treated Limited's failure to carry on business as an Antares franchisee after the grant of the injunction on 18 October as entitling it to terminate the franchise agreement without notice.
39. By a letter dated 11 December 2002, Limited's solicitors stated that it treated Srl's notice of termination dated 5 December as a repudiatory breach of the franchise agreement and accepted it. On the following day, on Limited's application, the injunction was discharged and the action has since proceeded as a claim for damages.

Establishment of EPD

40. It is clear that by the end of March 2002 at the latest, Mr Gargani had concluded that the relationship with Limited under Mr Kirby's control could not go on as it was. It was at this time that EPD was established. In his first witness statement, Mr Gargani stated:

"At the end of March 2002 a company by the name of European Plumb Direct Limited ("EPD") was established in Canterbury. At that time, Srl was concerned that Antares Limited would continue to act in serious breach of the franchise agreement so when Stefano Carmignani decided to open a company in the UK we supported his decision and he set up EPD. Stefano Carmignani was a serious person and a trusted employee of Srl and it was thought that EPD might one day be used as a franchisee of Srl in case a new franchisee was urgently required."

In his second witness statement Mr Gargani stated that Corinne Mode and Mr Carmignani wanted to set up their own company and they were encouraged to do so by Srl as a possible franchisee if the relationship with Limited terminated.

41. In cross-examination, Mr Gargani denied several times that EPD was established on behalf of Srl or himself. He repeated that he was just supporting a personal project of Mr Carmignani and Miss Mode. Miss Ercolini undertook a good deal of the administrative work involved in setting up EPD. Her evidence was that she did this as a favour to Mr Carmignani and Miss Mode, neither of whom spoke English. She denied that she was acting at the direction of Mr Gargani or that he had given instructions for the establishment of EPD. Mr Gargani also gave evidence that while he saw EPD as a possible replacement for Limited as franchisee, he had not decided to terminate the franchise agreement but was hoping to confront Mr Kirby with a choice of either complying with the agreement or facing its termination. Without an available replacement in a position to take over immediately, he knew that he would be in a weak position making this threat.
42. The written evidence of Mr Carmignani was very brief on this topic but in cross-examination he explained that he and Corrine Mode had the idea, following his visit to inspect Limited's operations in February 2002, of establishing a franchisee for the UK market. Mr Gargani was very enthusiastic about the idea. Mr Carmignani said that there was some discussion as to the price which would be paid for a UK franchise and a figure of £200,000 was mentioned, but nothing was agreed. He and Corinne Mode had decided that they would resign from Srl but had not decided whether they would operate from England or from a separate office in Lucca. Sonia Ercolini, who was Mr Gargani's personal assistant and a fluent English speaker, acted as intermediary with accountants in England, as a personal favour to Mr Carmignani and he personally paid for her to accompany him to see the accountants. An invoice from the accountants for charges of £1,306 in relation to work for EPD was, however, paid by Mr Gargani. Mr Carmignani explained that this was a personal loan to him by Mr Gargani, which he later repaid in cash. There was no prior discussion with Mr Gargani of the franchise granted on 16 September 2002. Everything happened very quickly and the business was run from Srl's offices, with Miss Ercolini and another English-speaking employee, Wilma Tomei, made available to deal with calls.
43. In her witness statement, Corrine Mode explained that she had wished for a long time to create her own business. The opportunity arose with the repeated failures of Limited, prompting her and Mr Carmignani to set up, with the support of Srl, a company that could become a franchisee in the UK. However, in her oral evidence she said that it was not a joint proposal. Mr Carmignani told her that he wanted to set up a company in England. He alone would own the company and she was not going to put any money into it. She would simply work for it as an employee. She was asked as a favour to Mr Carmignani to set up EPD and to that end was appointed company secretary and, accompanied by Miss Ercolini, went once to the accountants' offices in England to sign various documents. She has had no other involvement in EPD.
44. I am satisfied that the accounts given by Mr Gargani, Mr Carmignani and Miss Ercolini and in Miss Mode's witness statement are untrue. Mr Carmignani and Miss Mode were employees of Srl and neither of them spoke English or had any connection with the UK. Mr Carmignani is responsible for company administration and computer procedures and for monitoring operating procedures. In all the circumstances, it seemed highly improbable that they, rather than Mr Gargani, should be the driving force behind the establishment of EPD as an alternative to Limited as a franchise. It is to be noted that in November 2002 Mr Carmignani transferred the shares in EPD held in his name to Srl and EPD thereafter operated its business as an agent for Srl. I was very sceptical about these accounts of the circumstances in which EPD was established. This scepticism was increased by Miss Mode's oral evidence which was at odds with Mr Carmignani's evidence as well as her own witness statement.
45. Late in the trial, Mr Laughton, a partner in the firm of accountants dealing with the establishment of EPD, gave evidence and produced his file. The true position, in my judgment, emerges clearly from the file. The firm, Burgess Hodgson, had acted for Limited while it was owned by Mr Gargani and Idalgo Limited. The first document on the file is dated 4 April 2002 and records that Mr Laughton "requires new company for Mr Gargani". An off-the-shelf company was acquired and its name changed to EPD. There is a handwritten note by Mr Laughton of a telephone call on 10 April 2002. It includes the following points:

"1. Go ahead with new co.

2. Discussed position with Pini [solicitors for Srl] – no problem- Antares Ltd

3. To annul franchise contract & establish case v's. England Co.

4. Newco to be in new name & shares in name of other individual.

5. In name of a/c'ant at Antares

6. Co. Sec also someone else.

13. New franchise to be issued to [EPD]

18. FG [Mr Gargani] will arrange catalogue with Antares Srl logo & name of [EPD]"

It also records instructions to set up credit card facilities and to send details of the timescales for VAT registration, opening branch accounts and setting up the credit card facilities.

46. On 16 April 2002 Mrs Ercolini e-mailed to Mr Laughton asking, "can we start printing letterhead papers etc. Please advise asap. Any news on our appointments." A file note made by Mr Laughton at about this time records a discussion with Mrs Ercolini:

"Antares Limited was the UK franchisee for the Italian company Antares Srl to market the company's products in the UK (plumbing spares by catalogue). The company was sold with the benefit of the franchise contract, subject to relevant performance criteria. The new owners of Antares Limited have failed to meet the performance criteria set out in the franchise agreement, and it is the intention of Antares Srl to rescind the agreement. Legal advice in the UK has been obtained. In order to protect their position in the UK market, Antares Srl require a new vehicle to promote and sell their products – European Plumb Direct Limited. It is important that the new company is fully operational prior to the franchise agreement being rescinded as it must have the facility to take orders from the date the agreement is terminated."

47. Mr Gargani's involvement in the process is also clear from subsequent documents. As regards Mr Carmignani's role in EPD, a later request to Mrs Ercolini for details results in this reply:

"Stefano's role is that of Company director therefore he is responsible for all the transactions, signing of documents, decision making etc regarding new company. He is the head of the administration department in the Italian Company and has been working there for nearly 20 years."

48. A fax dated 13 May 2002 from Mrs Ercolini recorded that she and Mr Carmignani had visited a branch of Lloyds in Bishops Stortford and continued:

"I hope that now they can open an account ASAP for us as we already have been delayed in the starting up of the business."

EPD was registered with the Inland Revenue for corporation tax on 20 May 2002 and with Customs and Excise for VAT on 22 May 2002. An account with Lloyds TSB Bank was opened on about 19 June 2002. On 28 June 2002 it is apparent that there were delays in obtaining authorisation for a cardnet service which was not given until 20 August 2002.

49. These documents are strong evidence that EPD was in truth established by Srl, not by Mr Carmignani (and certainly not by Miss Mode) acting in a personal capacity. Having regard also to the other evidence to which I have referred, I find that EPD was established by or on behalf of Srl.
50. I am also satisfied that by late March or early April 2002 Mr Gargani had concluded that the franchise agreement with Limited could not continue. The documents in Mr Laughton's file show that EPD was established with the definite purpose that it should become the franchisee, rather than as a contingency measure in case Srl later terminated the franchise agreement. They disclose a clear wish that it should be ready to start business as soon as possible, and considerable frustration at the delays in obtaining the cardnet authorisation. As already mentioned, the letters of complaint from Srl to Limited ceased in April 2002 and only resumed in late July, repeating the complaints previously made. For over a week in mid-April Srl ceased the despatch of orders to Limited's customers and starting on 18 April steps were taken to transfer the 0845 number back to Srl. I consider it very likely that if EPD had been ready to start business earlier, Srl would have given notice of termination of the franchise agreement earlier.
51. These conclusions do not however mean that Srl did not have proper grounds for giving notice of termination of the franchise agreement. I consider those grounds later in this judgment.

The franchise agreement

52. The franchise agreement is in Italian and contains no provisions as to jurisdiction or its proper law. No objection has been taken by Srl to this court's jurisdiction to hear this case. The parties have all proceeded on the basis that for the purposes of this action the agreement should be construed, and all issues resolved, in accordance with English law. As I understand Srl's position, it does not formally accept that the agreement is to be governed by English law, but it makes no positive case that it is governed by Italian law and it has adduced no evidence as to Italian law.
53. When the case was opened, there was no agreed translation of the agreement. Instead, each side put forward different versions and I was invited to chop and change between them. On some points, each side would rely on the version used by the other side. I did not consider this to be satisfactory. In particular, English principles of construction assume that there is a single text to which they are applied. Moreover, I would have been adjudicating on the choice of translation of particular provisions without any proper basis for doing so. At an early stage of the trial, and with some encouragement from both sides, I directed the preparation of a new certified translation. In due course this was produced. Everyone was agreed that it was an improvement on the previous translations, although it is not always expressed in language which would be used by an English lawyer preparing the translation.
54. The agreement was made on 26 October 1998 between Srl as franchisor and Limited as franchisee. It is divided into 10 articles, which are sub-divided into numbered paragraphs. Article 1 is headed Recitals, but provides that the recitals set out in it "will represent, be and form an integral part of the Franchising Agreement." Paragraphs 3.4 and 3.5 contain definitions of Franchising and Franchising Agreement:

" "Franchising" will mean the totality of industrial or intellectual property rights concerned with trademarks, commercial names, insignias, utility models and know-how to be used in the re-sale of goods or the provision of services."

" "Franchising Agreement" will mean the agreement by which one business (the Franchisor) grants the right to exploit Franchising for the market and sale of specific goods and services to another (the Franchisee) which accepts a series of obligations in consideration for such grant."

Paragraph 4.2 describes Srl's franchising network:

"The Franchisor has developed a "Franchising network" throughout the world whose purpose is the promotion and assistance of dealerships each managed by its own autonomous owner. The said network is characterised by the following:

4.2.1 The ANTARES trademark;

4.2.2 The know-how, the slogans, the distinctive markings, the common identity, the same image and the same systems and management techniques used by all franchisees distinguished by a shared insignia made up of the phrase "Franchised ANTARES Dealer";

4.2.3 A project, created and developed for the whole franchising system, involving a series of services specially designed throughout for franchisees, intended to reduce their running costs and to accumulate and promote sales;

4.2.4 The making available to the Franchisees, in addition to the exclusive use of the trademark, of the items and resources set out under point 4.2.2 above;

4.2.5 Advertising and promotional initiatives, such as relations with the press, catalogues, different forms of printed communications etc, for the purpose of supporting its own business and image in addition to the intrinsic qualities of the services for the image of all franchisees;

4.2.6 Assistance provided to the Franchisees in the network through a comprehensive programme of training and tuition to allow the full transfer of know-how;

4.2.7 The intention to expand its franchisee network maintaining the quality of its image and style through a continuing and reciprocal collaboration with the participants in the same network and careful supervision of the franchisee by the Franchisor;"

Paragraph 4.4 provides that Limited has asked to participate in the network "in its own name and on its own account in its capacity as an autonomous undertaking". It goes on to provide that Limited is prepared:

"4.4.1 To enhance and exploit the Franchising with professionalism, continuity and efficiency;

4.4.2 To operate in absolute deference to the image and reputation of the "Franchising network" which it intends to join;

4.4.3 To ensure an adequate business structure for its company leading to a reasonable increase in sales within its operational area;

4.4.4 To maintain the necessary level of contact with the Franchisor on a continuing and immediate basis in order to inform it of all news, data and other elements that might prove of importance for the purposes of the exploitation of the franchising;

4.4.5 To follow all instructions scrupulously of a technical and operational nature received from the Franchisor, committing itself to ensure that such conduct is also followed by its employees, collaborators, intermediaries etc."

55. Article 2 contains the grant of the right to Limited to participate in the Franchising network and the acceptance by Limited of the obligations expressly provided in the agreement. Paragraph 3 provides for the area assigned to Limited. Its meaning is in dispute and I will consider it later. It continues by providing that the achievement of the purpose of the Agreement, that is, the exploitation of the franchising and the services provided by the franchising Network:

"will be connected to the co-operation and collaboration between the two contracting businesses which will operate in accordance with their common interests and in the integration of their respective business activities. The joint wishes of the Parties will be determined consistently with such a context without prejudice to their autonomy as separate and independent businesses exercising all their rights on their own account and taking on all obligations deriving from their respective business activities again, on their own account."

56. Consistently with the emphasis in the agreement on cooperation and collaboration between the parties, article 3 underlines the importance to the franchisor of the identity of the franchisee and those controlling it by requiring its consent to any assignment of the agreement or any change in the franchisee's shareholders. Paragraph 8 deals with waiver and forbearance and paragraph 9 emphasises that the parties will remain independent businesses. Article 4 para 1 provides for the initial duration of the agreement to be 20 years from the date of signing.
57. Article 5 para 2 requires Limited to pay for all goods prior to delivery and reserves to Srl the right to suspend supplies in the event of non-payment. It also contains provisions relating to telephone numbers which I will set out when dealing with the issues of the transfer of telephone numbers and nuisance calls.
58. Article 6 sets out duties of Srl as franchisor. These include the grant of:

"business management IT services more particularly described as the on-line use via internet of its own IT system: hardware and software."

Paragraph 1.5 sets out the system for ordering goods and includes obligations imposed on Limited:

"The Franchisor will normally, on a daily basis and on equal terms for all franchisees, prepare the respective orders for the Franchisee sent over the "client server" computer system, available for use by all franchisees. Orders of the Franchisee's customers sent in a complete and final manner by the Franchisee, will be prepared and made ready for daily shipment by the Franchisor on behalf of the Franchisee. The Franchisee thus undertakes to develop sales, to manage commercial relations, to offer the necessary assistance, to collect orders from customers and to transmit them over the computerised system provided for use in accordance with procedures to be agreed. The Franchisor undertakes to prepare the related individual shipments with their respective destinations to the Franchisee's customers, normally to be made ready on a daily basis at a departure time to be agreed."

Paragraph 1.6 provides that Srl would arrange for the printing of invoices, which were sent out in Limited's name with the goods, and for them to be automatically transcribed into Limited's accounting system. Further detailed provisions as regards orders and invoices are contained in article 7 para 3.3. Paragraph 4 provides for the selling prices for goods from Srl to Limited to be set out in a price list, up-dated on a periodical basis on reasonable notice of not less than three months.

59. Article 7 sets out the duties of Limited as franchisee and contains most of the provisions said by Srl to have been breached by Limited. Paragraph 1.1 imposes a requirement to comply with a variety of general legal obligations, including, in paragraph 1.16:

"To pay all direct and indirect taxes together with all other duties and fiscal charges relating to the conduct of its business activities and occupation of its premises properly and in good time pursuant to law."

60. Article 7 para 2 is headed "Obligations necessary in order to protect the rights of the Franchisor and the common identity and reputation of the "Franchising Network" ". By way of preamble to the specific obligations set out, it provides:

"The Franchisee, in the running of its business, by effect and in consequence of its joining the "Franchising Network" on the signing of this agreement, is aware, in the context of shared aims, that it is entering into and forming part of a system in which the contribution of individuals has an influence on the efficiency of the whole, just as the whole supports the efficiency of individuals and commits itself to maintain the validity of such concept unchanged. It further undertakes to defend all rights and property belonging to the Franchisor whether tangible or intangible, with reference in particular, to its relationship with third parties and to safeguard the common integrity and reputation of the "Franchising Network", committing itself to defend the substance and value of its image."

The specific obligations include:

"2.1.2 Not to exercise personally itself or through an intermediary activities which are identical or similar to those forming the subject matter of the agreement or, in any case, which are in competition with those carried out by the Franchisor or other franchisees forming part of the network;

2.1.3 Not to purchase shareholdings of any kind or in any way, whether directly or indirectly, in companies competing with the Franchisor.

2.1.6 To perform those stages of the promotional and advertising activities indicated to it, in a manner and with the means to be supplied and indicated by the Franchisor on the basis of the costs agreed from time to time. Such advertising costs together with those considered by the Franchisee to be necessary for the operation of its business, will be borne in their entirety by the Franchisee without prejudice to the fact that they must be agreed in advance with the Franchisor and approved by the latter;"

61. Article 7 para 3.1 provides for a minimum level of investment of the franchisee in premises, equipment and staff. It gives rise to no dispute in these proceedings, but it gives an idea of the relatively small scale of the operations envisaged for the franchisee. It must have full use of a furnished office of at least 5 x 4 metres capable of containing two work places with two telephone lines, one fax line and one ISDN line connected to the internet. It must have at least one computer and at least two office workers, one of whom may be the franchisee's owner. Under Mr Kirby's control, Limited never had more than two employees and used call centre staff, as needed, who were employed by associated companies and did similar work for other businesses controlled by Mr Kirby. It used a 600 square foot office at Hither Green, London, which was used also by the call centre staff. It appears from the evidence that not more than about half a dozen people worked there.
62. Article 7 para 3.2 deals with promotion, mailing lists and catalogues, and has given rise to significant dispute in this case. It provides:

"The following periodical commercial costs will be borne by the Franchisee:

3.2.1 The identification (or purchase) of a series of addresses of operators according to methods agreed with the Franchisor and the entering of the same by hand or by computerised means on the Franchisor's hard disk. Such address records will be constantly up-dated by the Franchisee according to the procedures agreed with the Franchisor. Such address records, even if loaded on the "Computerised Client Server" will be and will remain, the property of the Franchisee. Should the Franchisee transfer its business to another Franchisee, it will only be possible to assign such records in the event of the transfer of the whole business and never separately.

3.2.2 The supply of the translations of the catalogue in the language of the country concerned and of the up-dating commercial promotional materials;

3.2.3 The costs for the printing and mailing of catalogues and promotional materials agreed with the Franchisor. (The Franchisor will provide the photo-lithographical plant for the final version at its own expense)."

63. Disputes have also arisen in relation to article 7 para 5 which provides (in part):

"The Franchisee hereby covenants and agrees as follows:

5.1.1 To keep all accounting books required by the law in force up-to-date and in good order, also ensuring their preservation for the time required by law;

5.1.2 To use accounting methods, equipment and systems provided or suggested by the Franchisor or in any case, which are up-to-date and matching the requirements of the business. To this end the Franchisee will be required, at its own expense, to ensure that its own accounting staff or consultants discuss IT management with the Franchisor;

5.1.3 To prepare the six monthly and annual sales budgets (starting 4 months after the commencement of business);

5.1.4 To allow, without any obligation of advance notice, professionals authorised by the Franchisor to check observance of the obligations undertaken."

64. Article 8 sets out the parties' rights to terminate the agreement. It is central to Srl's case and there are important differences in its construction put forward by each side. I deal with it below.
65. There is little else of significance in the agreement. Article 9 sets out obligations of the franchisee following termination. Article 10 para 3.1 provides that no amendment of the agreement will be binding unless approved in writing and signed on behalf of each party. At the end of the agreement it is stated that there is annexed a copy, signed by both parties, of an Agreement of Understanding signed previously and "constituting an integral part of the agreement." I return to this in the next section, dealing with exclusivity.

Article 2 para 3: exclusivity

66. The relevant part of article 2 para 3 provides as follows:

"The purpose of this agreement will be the exploitation of the franchising and the services provided by the "Franchising Network" set up by the Franchisor in the context of the exclusive area assigned to the Franchisee, more precisely described as follows – the whole of the UK"

67. There is a dispute between the parties as to the meaning and effect of this provision. Limited submits that it is to be the exclusive franchisee for the United Kingdom. Srl submits that its intended effect is that Limited can operate as a franchisee only in the UK but that Srl is not prohibited from appointing one or more additional franchisees for the UK. In my judgment, Limited is correct on this point. The natural meaning of the words "the exclusive area assigned to the Franchisee" is that Limited is to be the sole franchisee. Their meaning is the same as if the phrase were "the area assigned exclusively to the Franchisee."
68. This construction is more obviously consistent with the assurance by the franchisee in article 1 para 4.4 that it has adequate financial resources "for the management of the operational area assigned to it", the operational area being defined in article 1.3.3 as:

"the geographically circumscribed and described area in which the franchisee will carry out its business as such, involving the exploitation of the franchising."

It also fits more easily with article 7 para 7.1 which permits the franchisor to reduce the size of the operational area if the franchisee does not meet minimum purchase levels.

69. Other provisions of the agreement do not fit well with a construction permitting more than one franchisee for a particular area. For example, the agreement requires the franchisee to translate the catalogue and to fix the prices at which the goods are offered for sale. If there were two franchisees for the same territory, this would have the surprising result of two separate versions of the Antares catalogue with different prices circulating in that territory. The evidence of Mr Gargani and Mr Carmignani established that in fact Srl never appointed more than one franchisee for the same territory.
70. Limited also placed some reliance on the Agreement of Intent sent to it in January 2001. I have referred to the statement at the end of the franchise agreement which refers to the annexed "agreement of understanding". No such annexed agreement is in evidence. Limited submitted that the overwhelming probability is that the Agreement of Intent is an English translation of the agreement of understanding to which the draftsman of the franchise agreement intended to refer. I agree that this is likely. Not only is the Agreement of Intent a preliminary agreement to a franchise agreement, but the same reference (VERS.B/10) appears on the front of the Agreement of Intent and of the standard form franchise agreement supplied to TSS in January 2001 and their general lay-out is also the same. The references in article 6 para 2.3 to specific provisions of the "agreement of understanding" can be tied in with clauses D and F of the Agreement of Intent. However, although the franchise agreement states that the agreement of understanding duly signed is annexed and Dr Mattolini signed the franchise agreement immediately below that statement, she denied that in fact an agreement of understanding had been signed or annexed to the franchise agreement. She explained that there was no need for an agreement of understanding given that Srl and Limited were at that time under Mr Gargani's common control.
71. I accept Dr Mattolini's evidence. It is entirely plausible that, for the reason she gave, the "agreement of understanding" was not signed or annexed and it is very surprising that, if there ever were an annexed and signed agreement of understanding, it never materialised either during the negotiations leading finally to the share sale agreement in November 2001 or at any later time.
72. Limited sought to rely on the Agreement of Intent as being the agreement of understanding because it expresses in clear terms that the franchisee is to have an exclusive franchise in the designated territory. It cannot however be relied on if it was not signed or annexed to the franchise agreement, and was not therefore part of the agreement. Nevertheless, for the reasons which I have already given, I hold in favour of Limited's construction of the exclusivity provision.
73. The significance of this issue arises in the period between the grant of the injunction on 18 October 2202 and Srl's second notice of termination given by Srl on 5 December 2002. During that period, while acknowledging Limited as a franchisee as a result of the injunction, it also continued to put EPD forward as a franchisee. It follows from what I held as to the meaning of article 2 para 3 that Srl was in breach of the agreement in doing so. I will consider later whether, as Limited submits, this excused it from further performance of its obligations under the agreement notwithstanding that the injunction against Srl remained in force.

Article 8: rights of withdrawal and termination

74. It is necessary to set out article 8 paras 1 to 4 in full:

"1. Breach and Manner of Withdrawal

1.1 Save as expressly provided under points 3 and 4 below, should one of the Parties not observe even one of the clauses of this agreement, this will give the other Party the right to withdraw from the agreement.

1.2 The parties, as also pursuant to the provisions below, will be required to indicate their intention to withdraw from this agreement by means of written communication sent by registered letter with notice of receipt to the other party with advance notice of 6 (six) months.

2. Withdrawal by the Franchisee

2.1 The Franchisee will have the power to withdraw from this agreement at any time in compliance with the procedure set out under point 1.2 above.

3. Withdrawal by the Franchisor

3.1 The Franchisor will have the power to withdraw from this agreement without prejudice to further rights or remedies, following a demand for performance within a time limit of 15 (fifteen) days in the following cases, the Franchisee not obtaining thereby the right to claim damages or indemnity of any kind, such cases constituting a breach of substantial importance for the Franchisor in that they are to be considered to have a significant bearing on the essence of this agreement and the Franchisee's obligations deriving therefrom:

3.1.1 Should the Franchisee and/or individual shareholders (where management is in the form of a company), carry out other activities in conflict, or in competition, with the Franchisor:

3.1.2 Should the Franchisee fail to send off the catalogues and/or promotional materials envisaged and agreed with the Franchisor:

3.1.3 Should the Franchisee fail to provide, or only partially or incorrectly provide, any information, news, up-dating etc. relevant to the obligations deriving from this agreement;

3.1.4 Should the Franchisee fail to manage its business in accordance with the provisions of article 7 point 4.

3.1.5 Should the Franchisee fail to fully, or only partially or incorrectly fulfil, all other obligations imposed on it under articles 5 and 6, with the exception of those expressly set out under point 3.1.4. above and those expressly set out under point 4, providing for immediate termination.

4. Express Termination Clause

4.1 The Franchisor will be entitled to terminate this agreement as of right by means of written communication sent under cover of registered letter with notice of receipt in the following cases, the Franchisee not obtaining thereby the right to make a claim for damages or indemnity of any kind:

4.1.1 Should the Franchisee fail to observe the provisions of article 5 and, in any case, should the Franchisee not make punctual payment of any amount of monies due under this agreement within fifteen (15) days on which such payment falls due or, in any case, by the date indicated by the Franchisor:

4.1.2 Should any one of the Franchisee's Administrative Authorisations necessary for the running of its business be revoked, withdrawn, suspended or not renewed for any reason;

4.1.3 In the case of the pronouncement of any court or administrative order for any reason attributable to the Franchisee or of a judgment which stops the Franchisee or even one of its shareholders (in the case of management in company form, including a company of fact) from continuing its activities just as in the case of any other restriction with the direct effect of transferring all or part of the rights enjoyed by the Franchisee pursuant to this agreement to third parties or the issuing of an order by civil or administrative courts requiring the closure of the agency or the operational offices, whether on a temporary or permanent basis, for reasons attributable to the Franchisee;

4.1.4 In the case of a petition of bankruptcy filed against the Franchisee or against even only one of its shareholders (where management is in company form, including a company of fact) irrespective of whom it may be proposed by or, in the case of a request for an arrangement with creditors or administrative receivership by the Franchisee and in a case where the Franchisee is subjected to any insolvency or liquidation procedures or to civil and/or criminal proceedings for tax, contributions and/or pensions evasion;

4.1.5 In the case of any conduct by the Franchisee or by one of its shareholders (where management is in the form of a company including a company of fact), including their disagreement, capable of having a negative influence on business or on the name or trademark of the agency and hence, of the Franchisor;

4.1.6 Should the original design of the ANTARES franchising system be amended by the Franchisee without the Franchisor's approval;

4.1.7 Should the pre-requisites set out under article 3 points 1 and 2 cease to be satisfied;

4.1.8 Should the Franchisee's ownership or company structure be varied without compliance with the provisions of article 7 points 2.1.2 and 2.1.3;

4.1.9 Should the provisions of article 7 points 2.1.5 and 2.1.7 not be complied with;

4.1.10 Should the provisions of article 7 point 3.6.7 not be complied with;

4.1.11 Should the Franchisee hinder compliance with the provisions of article 7 point 5 and in the event of the occurrence of the condition provided for in the last sentence of article 7 point 5.1.4."

Although paragraphs 1 to 3 refer to withdrawal and paragraph 4 to termination, neither side based any argument on this difference.

75. The general structure of article 8 suggests a graded system of termination, with the period of notice required being governed by the provision broken. The franchisee has an unrestricted right to terminate the agreement on six months' notice, without any need to rely on a breach or other event: paragraph 2.1 read with paragraph 1.2. The franchisor has no equivalent right, but there are three provisions giving it a right of termination on the occurrence of a breach or certain other events. First, under paragraph 1, it may give six months' notice of termination if the franchisee does "not observe even one of the clauses of this agreement". Secondly, under paragraph 3, it can terminate "following a demand for performance within a time limit of 15 days" in certain specified cases. Thirdly, under paragraph 4, on breach of particular provisions and certain other events, the franchisor "will be entitled to terminate this agreement as of right by means of written communication". Limited accepts that notice under paragraph 4 may take effect immediately, but there are the following disagreements on the proper construction of article 8:

i. Srl submits that any breach of the agreement is sufficient for the purposes of paragraph 1.1, whereas Limited submits that it must be a serious or substantial breach.

ii. Srl submits that under paragraph 3 it can withdraw from the agreement after the expiry of the time limit of 15 days, while Limited submits that there must then be a period of 6 months before the withdrawal can take effect.

iii. There is disagreement as to the precise requirements for the terms of a demand for performance under paragraph 3.1, particularly whether the time limit of 15 days must be specified.

iv. There is disagreement on the true construction of paragraph 4.1.5.

76. In support of his submission that only serious or substantial breaches of the agreement can trigger the right of withdrawal on six months' notice under paragraph 1, Mr Ralls points to the provisions of the agreement which indicate that the franchisee is essentially a small business and which repeatedly provide for cooperation between the parties. It is unrealistic to suppose, he submitted, that in a collaborative venture of this sort, the parties can have intended to permit the franchisor to terminate in the event of any breach, however trivial. In this connection, he contrasts paragraph 1 with the words in paragraph 3, "such cases constituting a breach of substantial importance for the Franchisor in that they are considered to have a significant bearing on the essence of this agreement and the Franchisee's obligations during therefrom". They are, he submitted, in effect a deeming provision, with the result that even a trivial breach of one of the obligations listed in paragraph 3 can bring that paragraph into operation. A similar point is made in relation to the provisions specified in paragraph 4, breach of which entitles the franchisor to exercise a right of immediate termination.
77. There are in my judgment insuperable obstacles to the construction of paragraph 1 advanced by Limited. First, the express terms of paragraph 1 suggest that any breach of the agreement entitles the other party to give notice of withdrawal. Short of adding words such as "however trivial the breach", it is difficult to see how the words "should one of the Parties not observe even one of the clauses of this agreement" could be made broader. Secondly, the words in paragraph 3.1 on which Mr Ralls relies, in particular the words "constituting a breach of substantial importance for the Franchisor", point against his submission. The absence of similar words of qualification in paragraph 1 is telling. Thirdly, there are difficulties of definition. Mr Ralls' sought to meet this objection by submitting that it should be equated with a breach of condition. This would essentially mean a repudiatory breach of the agreement, but in that case paragraph 1 would give the franchisor no more than the general law. Indeed it would qualify its rights under the general law, because it would be required to give 6 months notice of acceptance of a repudiatory breach. If paragraph 1 encompasses a wider group of serious braches than paragraphs 3 and 4, the scope of the right conferred by paragraph 1 is subject to real uncertainty. The parties cannot be taken to have intended such uncertainty. Fourthly, the qualification which Limited seeks to imply is not needed to make sense of article 8 nor is it by any means obvious that, if asked. Srl would have agreed to it.
78. This issue is not relevant to Limited's claim that the agreement was wrongfully terminated, because Srl does not rely on paragraph 1 and did not give six months' notice. However, if the agreement was wrongfully terminated, it may have a direct bearing on the amount of damages to which Limited is entitled. Srl argues that provided that it can show that Limited was in some respect in breach of the agreement, Srl would have been entitled to give six months' notice of termination. In these circumstances, it argues that Srl's damages would be limited to six months' loss of profits.
79. The second issue on the construction of article 8 is whether under paragraph 3 Srl is entitled to terminate after the expiry of 15 days or must wait a further 6 months. This is important to any reliance by Srl on paragraph 3.1, because it did not wait for six months before terminating or give six months' notice of withdrawal. Read on its own, paragraph 3 would certainly not require a further period of six months. The power of withdrawal is stated to arise "following a demand for performance within a time limit of 15 days". It is clearly implicit that the 15 day period must have expired without due performance but there is no requirement for any further period. Limited's argument that a further six months is required rests solely on the words "as also pursuant to the provisions below", in paragraph 1.2. That paragraph specifies the need for six months' notice of withdrawal upon breach under paragraph 1.1. It is common ground that it applies also to withdrawal by Limited under paragraph 2.1; there is an express requirement in paragraph 2.1 for withdrawal by the franchisee to be "in compliance with the procedure set out under point 1.2 above". There are no such words in paragraph 3.1. Limited must therefore rest its entire submission on the use of the plural "provisions" in paragraph 1.2, rather than the singular which would tie in with just paragraph 2.1. Mr Gourgey raised a point that the exact translation of the original Italian is not "provisions" but "what is provided below". Be that as it may, the plural "provisions" is an inadequate basis for Limited's submission when set against other considerations such as the absence from paragraph 3.1 of words such as "in compliance with the procedure set out under point 1.2 above" and the fact that it would take 15 days longer to terminate under paragraph 3.1 than under paragraph 1.1. This would be inconsistent with the position stated in paragraph 3.1 that it applies to breaches of substantial importance.
80. The third issue of construction is whether a notice under paragraph 3.1 must in terms demand performance within 15 days. This is also important to any reliance by Srl on paragraph 3.1, because none of its letters in terms demanded performance within 15 days. The right of withdrawal is expressed to arise "following a demand for performance within a time limit of 15 (fifteen) days in the following cases". Mr Ralls for Limited submitted that it was a necessary pre-condition to the exercise of the right of withdrawal under this paragraph that the demand should specifically require performance within 15 days. Alternatively, applying the reasoning of the majority speeches in Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749, the demands must be expressed in such a way as to leave the reasonable recipient in no reasonable doubt that it was a demand for performance falling within article 8 para 3.1. He submitted that none of the letters relied on by Srl could be read in that way.
81. Mr Gourgey for Srl submitted that paragraph 3.1 requires only a demand for performance, followed by a failure to perform within 15 days, before it could exercise its right of termination under the paragraph. There was no need for the demand to specify a time limit of 15 days for performance. Alternatively, a reasonable recipient of the letters in question in this case would have been left in no doubt that they were demands for performance for the purposes of paragraph 3.1.
82. I accept the submissions of Mr Ralls on these points. In my judgment paragraph 3.1 is drafted so as to require the demand for performance to specify the time limit of 15 days, either in terms or perhaps by expressly referring to it as a demand for the purposes of article 8 para 3.1. In Mannai Investments, at p. 767, Lord Steyn distinguished the break clause in the lease under consideration in that case from

"a case of a contractual right to determine which prescribes as an indispensable condition for its effective demand that the notice must contain specific information."

In my judgment, the requirement to specify the time limit of 15 days for performance for an effective demand under paragraph 3.1 is such a case. Likewise, in Embankment Place Hotels (Blackfriars) Ltd v. Blackfriars Hotels Ltd [2003] EWCA Civ 588, to which Mr Ralls referred, the Court of Appeal held, in a case concerning a contractual notice to be given by a hotel developer to the manager of the date by which the developer would have completed its obligations and thereby trigger a certification process, that the notice had to specify the date by which the relevant obligations would have been performed. The context of the demand in this case is that failure to perform within 15 days will trigger the very serious consequence of an entitlement on Srl's part to terminate the agreement. There is every reason to suppose that against that background the parties' intention was that the demand should specify performance within that time limit. The construction put forward by Mr Gourgey involves the opening part of paragraph 3.1 being re-written as:

"The Franchisor will have the power to withdraw from this agreement without prejudice to further rights or remedies if, following a demand for performance in the following cases, the Franchisee does not comply within 15 days . . . "

In my judgment, that is not the meaning of the paragraph as it stands.

83. As regards the alternative submissions of both Mr Ralls and Mr Gourgey, none of the letters relied on by Srl can in my view come near to meeting the test propounded by Lord Steyn in Mannai Investments at p. 768:

"Even if such notices under contractual rights reserved contain errors they may be valid if they are "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate": Delta case, at p. 454 E-G, per Slade LJ and adopted by Stocker and Bingham LJJ see also Carradine Properties Ltd v. Aslam [1976] 1 WLR 442, 44. That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice. I would gratefully adopt it."

None of the letters required performance within 15 days or made any reference to paragraph 3.1, or any other part, of article 8. None stated that a failure to perform would lead to the exercise by Srl of a right of withdrawal from the agreement. In terms of threatened consequences, the furthest that any of the letters go is to refer, in letters dated 12 March and 5 August 2002, to Srl being forced to make "serious decisions", and even then, in a subsequent letter dated 14 August 2002, Srl proposed a meeting at the beginning of September.

84. I will later consider each of the breaches of the agreement alleged by Srl in support of its notice of termination in September 2002. It follows from what I have just held that, if any breaches are established and gave rise to a right of termination under article 8 para 3, rather than para 4, Srl cannot rely on them because it failed to make the demand for performance required by paragraph 3.
85. The fourth issue relates to paragraph 4.1.5 which is one of the events giving rise to a right of immediate termination by Srl. It is in the following terms:

"In the case of any conduct by the Franchisee or by one of its shareholders (where management is in the form of a company including a company of fact), including their disagreement, capable of having a negative influence on the business or on the name or trademark of the agency and hence, the Franchisor."

The provision focuses entirely on the franchisee and its shareholders and its general thrust is clear enough, although it may not always be easy to say whether the conduct in question is capable of having a negative influence. The dispute centres on the words "including their disagreement". Mr Gourgey for Srl submits that on their natural construction they refer to a disagreement between the franchisor and franchisee. Although there is no prior reference to the franchisor in paragraph 4.1.5 itself, he submits that it should be read with the opening words of paragraph 4 which do of course refer to the franchisor. In my judgment this is too strained a reading of the paragraph. As I have said, the paragraph is focussing not on the franchisor but on the conduct of the franchisee and (if it is a company) its shareholders. The only reference to the franchisor is as the person whose name or trademark may be adversely affected. I think Mr Ralls is right to say that it deals with situations such as disagreements between the shareholders or between the franchisee and a shareholder, producing for example deadlock in the management of the franchisee. The construction advanced by Srl could produce a situation in which a disagreement would entitle Srl to terminate the agreement with immediate effect, even though Srl was acting unreasonably in its disagreement with the franchisee and no breach of the agreement had been committed by the franchisee.

Srl's notice of termination: September 2002

86. Limited's case is that the notice of termination contained in Srl's letter dated 13 September 2002 and received on 20 September 2002 was given in breach of the franchise agreement. No grounds for termination were stated in the letter or subsequently given to Limited until service of Srl's defence on 15 November 2002. However, there had been formal letters of complaint, raising a variety of issues, sent by Srl to Limited in January to March 2002 and in July and August 2002.
87. By the start of the trial Srl had pleaded and relied on seven grounds to justify the termination, all known to Srl on 13 September 2002. In addition and in reliance on Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339, it had pleaded two further grounds discovered by it only after notice of termination had been given. In his closing speech, Mr Gourgey for Srl reduced the number of grounds to a total of five, comprising four known on 13 September 2002 and one discovered later. The pleading of so many alleged breaches, followed by the abandonment of nearly half of them, amply justifies Mr Ralls' criticism that Srl was engaged in a bid to find grounds to justify its decision to terminate the agreement. However, as I have already said, the remaining grounds must be examined on their merits, because if Limited was in breach of the agreement in a way which entitles Srl to terminate the agreement with immediate effect, it is entitled to rely on it. I will now deal with each of these grounds.

Catalogue and database

88. As already explained, the catalogue is the basis of the whole Antares business. Its production and distribution is critical to the success of the business. Given the central importance of the catalogue, it is surprising that the franchise agreement does not deal with it in clearer and more specific terms. There is, for example, nothing in the agreement which directly addresses either the frequency of new editions of the catalogue or the time in the year when new editions are to be released. However, article 1 para 4.2 includes in the list of features of the Antares franchising network:

"Advertising and promotional initiatives, such as relations with the press, catalogues, different forms of printed communications etc, for the purpose of supporting its own business and image in addition to the intrinsic qualities of the services for the image of all franchisees."

It is clear from the list in paragraph 4.2 that they are all features or services to be provided by Srl. The franchisee is made subject to an equivalent obligation by article 7 para 2.1.6, which requires it

"To perform those stages of the promotional and advertising activities indicated to it, in the manner and with the means to be supplied and indicated by the Franchisor on the basis of the costs agreed from time to time . . ."

The effect of these provisions is, in my judgment, that decisions as to the preparation of a new catalogue and as to the timing of its distribution lie with Srl. It could hardly be otherwise, as Srl holds all the stock and is promoting a single Antares network. There is essentially one catalogue, prepared in Italian, and then distributed in other countries in translated versions. It is difficult to see that the business could operate in a fully effective form if each franchisee was using a different catalogue. The translation and printing of the catalogue and any promotional materials are the responsibilities of the relevant franchisee, but Srl is responsible not only for the preparation of the Italian version but also for preparing and supplying the photo-lithographic plate of the translated catalogue and promotional materials from which they are then printed in bulk: see article 7 paras 3.2.2 and 3.2.3. It is therefore apparent that the preparation and production of a catalogue requires a high degree of cooperation between Srl and its franchisees, with Srl entitled to direct and control the process. It is, however, the franchisee which has the right and responsibility to fix the prices to be inserted in the catalogue for its territory.

89. As important to the Antares business as the catalogue itself is the mailing list of actual and potential customers to whom it is sent. Article 7 para 3.2.1 imposes as an obligation on the franchisee:

"The identification (or purchase) of a series of addresses of operators [i.e. actual and potential customers] according to methods agreed with the Franchisor and the entering of the same by hand or by computerised means on the Franchisor's hard disk. Such address records will be constantly up-dated by the Franchisee according to the procedures agreed with the Franchisor."

90. It goes on to provide that, although loaded on to Srl's computerised client server, the address list will remain the property of the franchisee.
91. The UK version of the catalogue in use at the time of the acquisition of Limited by TSS in November 2001 was catalogue 26, produced in 2000. It is clear that Srl was concerned during 2001 about the impact of the delay in completion of the sale on the preparation of a new catalogue: see a letter dated 20 July 2001 from Srl's solicitors to TSS's solicitors. The need to prepare a new catalogue was picked up by Srl in communications with Limited in December 2001. In the agenda for the meeting held in Italy on 22 January 2002, it was described as urgent. In his evidence, Mr Kirby accepted that it was made clear at the meeting that a new catalogue needed to be prepared urgently.
92. In its defence, Srl alleges that Limited did not supply relevant information, such as new prices, details of the promotions and a database of proposed recipients to enable new catalogues and the accompanying promotional material to be printed and distributed by no later than the Spring of 2002. As a result, it is alleged, the new catalogue was never printed. Leaving aside the issue of the database, which I will address below, Srl has not in my judgment made out this case. The correspondence between January and March 2002 shows that the supply of information, including prices, was a two-way process. The position was reached by 19 March 2002 that Limited had supplied all the necessary information, other than the sterling prices on some products for which it had not yet received the selling prices from Srl to Limited. Limited pressed for this information by letter dated 22 March 2002, and on the same day reminded Srl that it had not received a copy of the promotional letter, for which Limited had supplied a list of products on 13 March 2002 at the latest. It does not appear that either a draft of the promotional letter or the remaining selling prices were supplied by Srl. It is clear from the correspondence that Srl seriously disagreed with the pricing policies which Limited proposed to adopt, but accepted that under the terms of the franchise agreement it was Limited's right to fix the prices as it wished. In its letter of 14 March 2002, after advising against Limited's pricing policy, Srl continued:

"However, in any case, not having received any different orders, we shall proceed to create the printing file of your catalogue with the prices indicated in the CD-Rom we received….

Before supplying the files to the printer we shall send you a final draft copy to be checked."

There is no evidence that Srl did either of these things. By this time Limited had supplied all the information it could and, as this letter shows, any earlier delay by Limited would not have prevented Srl from proceeding with printing a new catalogue at this stage.

93. In his closing speech, Mr Gourgey accepted that, leaving aside the database, there was no breach of the franchise agreement as regards production of the new catalogue after 19 March 2002. However, he did point to the letter dated 9 April 2002 from Limited to Srl, which stated:

"The marketing of Antares Ltd is the responsibility of ourselves, although we listen to your years of experience and advice ultimately we will decide when catalogues are printed, distributed and in what quantities. Catalogues and any other marketing activity we undertake will incorporate all the correct logos to give Antares a strong corporate image in the UK market."

Mr Kirby made the same point in his oral evidence on a number of occasions. In my judgment, this represented a serious misunderstanding on his part as to the true effect of the franchise agreement, and strengthened Mr Gargani's view that he could not continue in business with Mr Kirby. However, Srl did not at the time suggest that this represented an anticipatory breach of the agreement, and, as I have held, by 19 March 2002 it was Srl rather than Limited which was failing to take the steps needed to finalise the new catalogue and promotional material.

94. This leaves the issue of the database. Mr Gourgey described the failure to provide a database as the real bone of contention between the parties and the essence of the breach about which Srl complains regarding the period after 19 March 2002.
95. I have quoted above the terms of article 7 para 3.2.1 which set out Limited's obligations as regards a database. The initial obligation was "the identification (or purchase) of a series of addresses of operators according to methods agreed with the Franchisor and the entering of the same by hand or by computerised means on the Franchisor's hard disk". This had been done while Limited was still under Mr Gargani's ownership. There was also a continuing obligation: "Such address records will be constantly up-dated by the Franchisee according to the procedures agreed with the Franchisor." All such records were to remain the franchisee's property. It is clear from its context in article 7 para 3.2 that the obligation is to maintain a mailing list of addressees for the catalogue. The initial mailing list must be for that purpose and, although in part of his evidence Mr Kirby suggested that Limited complied with their obligation by adding the names of new customers as and when they placed orders from a current catalogue, there is no reason why the up-dating process should be confined in this way. In view of the central importance of the catalogue and mailing list to the Antares business, it would be surprising if a franchisee was not required to keep the list "constantly up-dated" by the addition of new potential customers. It was fairly pointed out on behalf of Limited that it could not be obliged to add every name it came across, irrespective of whether they could be considered serious potential customers. That must be right. Limited would need constantly to make judgments on whether a particular name should be added to the database, but the obligation remained to update the list constantly with the names of suitable potential customers.
96. The area of dispute relates to a large database owned by TSS. TSS itself was under no contractual obligation to make any part of it available to Srl or Limited. The share sale agreement with Srl contained no such obligation and there was no contract between TSS and Limited. However, I am satisfied on the evidence that from early 2002 Mr Strafino was given unrestricted access to the TSS database as well as other databases, in order to decide on additional addressees for the Antares catalogue. Mr Strafino had no connection with TSS and worked exclusively for Limited, and it follows that through him Limited had unrestricted access to the database. I find on the basis of Mr Kirby's evidence that he knew and agreed that Limited had access to the TSS database.
97. The issue of up-dating was on the agenda for the meeting in Italy on 22 January 2002 which was attended by Mr Kirby and Mr Strafino. Srl wrote to Limited on 23 January 2002 setting out the matters said to have been agreed at the meeting. There was no protest from Limited as regards that letter and I find that it accurately summarised the essential matters agreed at the meeting. One of the matters agreed was that the TSS database would be made available to Limited and Srl for distribution of the Antares catalogue. I do not accept the evidence of Mr Kirby and Mr Strafino that while it was discussed at the meeting (although they differ on that), they did not agree to supply the TSS database. Mr Kirby's evidence showed that Mr Strafino thought that Mr Kirby had acted too hastily in agreeing to this. The TSS database was commercially valuable and he considered it unwise simply to let Srl have unlimited access to it. Following the meeting, as I find, Mr Kirby and Mr Strafino discussed this and agreed that at most some other database would be supplied to Srl. This was not disclosed to Srl and, as Srl pressed during February and March 2002 for the new database, Mr Strafino at first sent prevaricating replies. For example, on 19 February 2002 he wrote:

"The list of addresses for the new database is still being compiled and I can assure you that you will receive this list as soon as it is finished."

and again on 1 March 2002:

"The new client database is being compiled currently and will be sent to you upon completion."

It was in Mr Strafino's letter dated 25 March 2002 that a different approach was disclosed:

"As I have explained in previous letters and telephone conversations, the client database is being compiled at present, and as soon as it is ready will be sent up to you. The database that exists already belongs to Total Spares and we feel that there would be a conflict should Total Spares customers be sent an Antares catalogue, therefore this is why we are compiling a new database. However, seeing that the catalogue is being sent out by us in the UK, I cannot understand the urgency from yourselves to receive this database. With the existing Antares database and the new database we are compiling we are able to print off address labels and therefore not having this information at present should not hold up the printing or despatching of the catalogue, CD-ROM catalogue and the promotional letter."

98. I am satisfied that Mr Strafino was working through the TSS database with a view to deciding which names should be added to Limited's mailing list. Mr Kirby gave evidence that Limited would supply to Srl its revised mailing list of the names and addresses of all potential customers at the time that it sent out the catalogue. This evidence was not in his witness statement, although I appreciate the witness statement was made before the defence was amended to include allegations with regard to the database, nor was there any hint of it in his cross-examination until after he had been taken to the provisions of the franchise agreement which required Limited to update the database. Until that point, his oral evidence was rather different. He said that he and Mr Strafino did have other databases of customers that they intended to mailshot as part of Limited's business but there was no reason for Srl to have them. Their details would be put on to Srl's system only as and when they placed orders. He further said that they would supply only part of an updated database to Srl but would send catalogues or CD-ROMs to all names on the database, whether or not supplied to Srl. His understanding, as stated in both his witness statement and oral evidence, was that the database was entirely a matter for Limited and there was no obligation to provide the updated list to Srl. As appears from Mr Strafino's witness statement, this was also his understanding. I am satisfied that Mr Kirby and Mr Strafino wrongly believed that Limited had no obligation to add the names of potential new customers to the database on Srl's system. I am also satisfied that they intended to use other databases available to Mr Kirby and which he made available to Mr Strafino, without passing names and addresses to Srl until an order was placed. These databases included, in particular, TSS's database.
99. In cross-examination, Mr Strafino gave evidence that by April–June 2002 he had completed a revised database for Limited and had prepared an additional list of 1700 names which he sent on disk to Srl. Along with the 25,000 or so names on the Limited database and new customers who were added as they placed orders, this was the complete list of names to which the catalogue would be sent. There was no mention in the witness statements of Mr Kirby or Mr Strafino that an additional list of new names had been prepared and sent to Srl. No accompanying letter or any other letter or fax referring to it is in evidence. No mention of it is made in Srl's letter dated 25 July 2002, in which it complained that the database has not been updated, and in no response did Limited state that a list of 1700 had earlier been sent. I do not accept Mr Strafino's evidence on this and I find that no additional database was supplied by Limited to Srl.
100. Limited's obligation under article 7 para 3.2.1 was constantly to up-date the list held on Srl's system by adding in the new names and addresses which it intended to use. The new names and addresses were needed for the distribution of the new catalogue. It was agreed on 22 January 2002 that they would be added within a short period to enable this to proceed. The position subsequently adopted by Limited that production and distribution of the catalogue was entirely a matter for its decision was, as I have already said, contrary to its obligations under the franchise agreement, and it was not therefore a legitimate basis for refusing or delaying the update of the database. The updating should have occurred or at least started by mid-March 2002. Mr Kirby and Mr Strafino, on behalf of Limited, were intending to send the catalogue to names on the TSS database which they did not load on to Srl's system and would not do so unless and until an order was placed. In my judgment, Limited was in breach of article 7 para 3.2.1 in relation to updating the database. It was important to keep Srl's database updated because it was responsible, under the arrangements for the new catalogue, for printing the names and addresses on promotional letters which would be sent out with the catalogues.

Price increases

101. Srl alleged in its defence that:

"Also contrary to the instructions and advice given by Srl to Limited, the latter increased their selling prices whilst using the 2000 catalogue although it was expressly stated on its front page that prices were guaranteed until its next publication. This constituted another breach of article 7, clause 2.1.4 since once more the image of the network was damaged."

The statement as to fixed prices appears prominently on the front cover of the catalogue and is repeated inside the catalogue. Srl's evidence in support of this allegation of increased prices was a statement by Mr Gargani that Srl became aware of higher prices being charged by Limited after it received telephone complaints from customers. It then noticed from the computerised accounting system that Limited had charged higher prices. On his instructions, Sonia Ercolini carried out a survey, which was in evidence. No mention of any complaints was made to Limited at the time and no names of complainants or details of their complaints was supplied in the course of this litigation. In cross-examination Mr Gargani could give no details.

102. Mr Strafino's evidence, which I accept, was that Limited sold goods to a few customers at higher prices than those shown in the 2000 catalogue but none of them had received the catalogue complete with the sterling prices. In other words, they were all new customers who requested a price for particular products, normally after receiving a copy of the whole or part of the catalogue with no prices stated. All customers who had received the full catalogue were charged the prices stated in it.
103. Srl's case is that charging these higher prices entitled them to exercise the right of immediate termination under article 8 para 4.1.5 as it constituted conduct by the franchisee "capable of having a negative influence on business or on the name or trademark of the agency and hence, of the Franchisor". Although actual harm need not be shown, Srl cannot in this instance rely on this paragraph. On the evidence I am not satisfied that any complaints were made to Srl and, in any event, charging higher prices to a few customers who have not previously received the catalogue, while in all other cases adhering to the pricing policy stated in the catalogue, cannot sensibly be regarded as capable of having a negative influence on business or on the name or trademark of Limited or Srl.

Accounts

104. Srl alleges that Limited was in breach of its obligation under article 7 clause 5.1.1:

"to keep all accounting books required by the law in force up to date and in good order, also ensuring their preservation for the time required by law."

In February 2002 Mrs Ercolini and Mr Carmignani visited Limited's offices and, in accordance with the right given by article 7 para 5.1.4, inspected its accounting systems. Following the visit, Srl sent a letter dated 28 February 2002 to Limited detailing shortcomings with regard to the accounting records. The points were repeated in a letter dated 28 March 2002. Mr Strafino replied on 4 April 2002, stating that the logging of invoices from Srl to Limited on the computerised records maintained on Srl's system would be brought up to date by 10 April 2002 and that all other invoices from suppliers together with other overhead charges were entered on Limited's own accounting records system. Under article 7 para 5.1.2 Limited was permitted to adopt this approach and provided that the records were kept up to date Limited would comply with its statutory obligations, under section 221 of the Companies Act 1985. This issue next appears in the correspondence in a letter dated 5 August 2002 from Srl to Limited. Srl repeated the items raised in its earlier letters and stated that they had not been remedied. As Srl had not undertaken any further inspection of Limited's accounting systems and records, I do not understand the basis for that assertion.

105. Nonetheless it appears from the evidence that Limited's accounting records were to some extent deficient. Mr Richard Thacker, Limited's own accounting expert, stated in paragraph 3.40 of his report:

"Generally the accounting records maintained for the entire period of Limited's existence, during the period of ownership of both Sig. Gargani/Idalgo and Total/Palmer are either poor or apparently incomplete or non-existent."

In cross-examination, Mr Thacker said that the term "non-existent" applied more to the Gargani/Idalgo period of ownership but:

"broadly speaking, the purchases were being accounted for on a cash-paid basis, rather than on an invoice basis. There were certain payroll records which were not present, there is a VAT return to 31 August 2002 which does not seem to be there. So those sorts of things would be the sorts of things one would expect to see in a reasonable set of records."

It was difficult for him to see from the records which he inspected whether all PAYE was properly accounted for in Limited's records. In re-examination, he agreed that these were all matters which he would expect to be sorted out by the auditors during the annual audit. There was no evidence from Limited to show that the accounting records had in fact been in a better state than described by its own expert.

106. On this evidence I find that Limited's accounting records were not maintained up to date and fully in accordance with section 221 of the Companies Act 1985. The fact that the difficulties could be sorted out on an audit, after discussion with the directors and others and after collation of invoices, payment records and so on, does not mean that either in substance or in form the accounting records were properly maintained. In my judgment, Limited was in breach of its obligation under article 7 para 5.1.1.
107. The question then is whether this entitled Srl to terminate the agreement in September 2002. Article 8 para 3 does not refer to a breach of article 7 para 5 but article 8 para 4.1.11 gives Srl a right of immediate termination:

"Should the Franchisee hinder compliance with the provisions of article 7 point 5 and in the event of the occurrence of the condition provided for in the last sentence of article 7 point 5.1.4."

For a number of reasons, this paragraph (or its translation) is not easy to follow. The words "hinder compliance with" are apt to describe only a breach of article 7 para 5.1.4, not the other sub-paragraphs, and article 7 para 5.1.4 has only one sentence. Mr Gourgey argued that the words "hinder compliance with" should be construed as meaning "failing to comply with" and that the sub-paragraph has two separate parts. The first deals with a failure to comply with any term of article 7 para 5 and the second deals specifically with article 7 para 5.1.4. Mr Ralls submitted that the words "hinder compliance with" should be given their ordinary meaning. The only part of article 7 para 5 to which the notion of hindering compliance can relate is para 5.1.4 and article 8 para 4.1.11 should be as a single provision applying only to a breach of article 7 para 5.1.4.

108. In my judgment, Mr Ralls is right in his submission. First, as already mentioned, the words "hinder compliance with" have a distinct meaning, which is applicable to article 7 para 5.1.4 but not to the other parts of para 5.1. Secondly, "the occurrence of the condition provided for in . . . article 7 point 5.1.4" can sensibly be read as referring to the Franchisor authorising professionals to make checks permitted by para 5.1.4. Thirdly, there is a real commercial difference between failing to keep correct accounting records or to use appropriate accounting methods or to prepare budgets on the one hand and hindering or refusing to allow an inspection on the other. The latter is by its nature likely to be a deliberate breach, which will have the effect of preventing Srl from discovering whether there has been compliance with, for example, paras 5.1.1 and 5.1.2. It is readily understandable why refusing to allow or hindering an inspection should be specified as a ground for immediate termination, while it would be surprising if breach of any other parts of article 7 para 5.1, which could well be minor or inadvertent, had the same effect.
109. Accordingly, in my judgment, Srl was not entitled to rely on shortcomings in Limited's accounting records as a ground for termination in September 2002.

Competition

110. Srl alleges that in respect of one product, a small hand-held gas detector, Limited competed with Srl. The gas detector was manufactured by a Korean company, Daebon Electronics Ind. Limited and marketed under the name "Detekta-Gas".
111. Mr Kirby's evidence was that in the spring and summer of 2001 he had discussions with a Korean distribution company, Kyung Dong Boiler Co, with a view to a distribution agreement for the UK. At that time, it appears that Kyung Dong had exclusive distribution rights for this product. An unsigned agreement dated 5 July 2001 between Kyung Dong and TSS for sole distribution rights in the UK and Europe was produced in evidence. Mr Kirby could not remember whether it was signed. A new company, Omnitron Limited, was incorporated on 26 September 2001 to distribute Daebon products, including the gas detector, in the UK. As with the other companies in which Mr Kirby was involved, I am satisfied that he controlled it. He gave evidence that on 3 September 2002 he organised the first shipment of gas detectors and that Omnitron commenced trading from its incorporation. This is borne out by its accounts for its first year, which state that it commenced trading on 1 October 2001. The gas detector was sold by Omnitron through distributors, and also to major chains such as B&Q and Homebase for the do-it-yourself market. None of this evidence was challenged, although there is confusion as to whether and, if so, when Omnitron had distribution rights for the UK alone or for Europe as well or even for the entire world. In his statement Mr Kirby refers to an agreement being reached by him for Omnitron in January 2002 to buy directly from Daebon, but the first written agreement in evidence with Daebon is dated 18 July 2002 and grants an exclusive agency for the world to Omnitron. There is also in evidence a copy of a further agreement to similar effect dated 29 November 2002 and commencing on 1 February 2003.
112. It is not necessary to resolve precisely which written agreements were made and on what dates. It is clear that before TSS agreed to purchase Limited in November 2001, Omnitron was distributing the gas detector.
113. There are differences on the evidence as to when Mr Gargani first knew of Mr Kirby's involvement in the distribution of the gas detector and whether Mr Gargani raised any objection. The evidence of Mr Kirby and Mr Strafino is that when they went to Lucca for the meeting on 22 January 2002 they took with them a number of products which were not in the current Antares catalogue but which they thought might be of interest to Srl. One of the products was the gas detector. It was the one product which interested Mr Gargani and he arranged for his graphics department to photograph it. Shortly after the meeting, Mr Gargani sent a CD to Mr Strafino, containing a draft of a page of the forthcoming international catalogue (which is produced in English) and asked him to proof-read the entry for the gas detector. A copy of the CD and the draft of the page is in evidence and was identified by Mr Strafino.
114. Mr Gargani denies this account. He agrees that he sent the CD with the page showing the gas detector to Mr Strafino for proof-reading, but said that Srl had received a sample from Korea which was used for the photograph and denied that he had any discussion with Mr Kirby or Mr Strafino about introducing the product into the catalogue. I should say that there was again some confusion, because Mr Gargani was cross-examined on the basis that he had been shown the gas detector by Mr Kirby and Mr Strafino and arranged for it to be photographed, not at the meeting in Lucca on 22 January 2002 but at the trade fair in Milan on 5 to 7 March 2002. However, Limited's case remains that this occurred on 22 January 2002 and it is clear that Mr Gargani denies that it occurred at all, whether in Lucca in January or Milan in March. I consider this difference in the evidence below.
115. Mr Kirby and Mr Strafino attended the trade fair in Milan on 5 to 7 March 2002 and manned an Omnitron stand. Mr Strafino had earlier e-mailed Mr Gargani to say they would be at the fair between those dates and suggested that they should meet. There is nothing in the e-mail to suggest to Mr Gargani, contrary to his evidence, that Mr Kirby and Mr Strafino were attending the fair in order to be on the Srl stand. Mr Gargani's evidence was that this was the first time that he knew of Mr Kirby's involvement with Omnitron or the sale and distribution of the gas detector and that he was very surprised as it meant they were in direct competition with Srl. He regarded it as a very serious breach of the agreement. According to his witness statement, he approached Mr Strafino and complained about this activity, to which Mr Strafino replied that he knew but he was only obeying Mr Kirby's orders. In his oral evidence, he said that in the week after the Milan fair he spoke to Mr Strafino and told him that the situation was very serious because it was unfair competition, entitling Srl to terminate the agreement immediately.
116. Notwithstanding the alleged seriousness of this activity, Mr Gargani did not once raise any complaint or issue on the gas detector and competition in correspondence with Limited or in any conversation with Mr Kirby, for example when they met for lunch at the Milan fair. When this was put to Mr Gargani, he said that he realised that the situation could not go on, that by mid-March relations had deteriorated and it was not worth writing all these letter which were anyway ignored, that the catalogue was the more important issue, and maybe he was waiting for advice from his lawyer. Before the Milan fair, Srl had written several letters to Limited raising a variety of complaints and issues. A considerable number of similar letters were sent to Limited after the Milan fair in March and April 2002. One of the letters, dated 12 March 2002 was written expressly with reference to the meeting held at the Milan fair to record what had been agreed. Detailed letters of complaints were sent in July and August 2002. In none of these letters was the issue of the gas detector and competition raised, but many other issues, some of which appear to be less significant, were detailed. I find it impossible to accept that if Mr Gargani had truly considered that promotion and sales of the gas detector constituted a breach of the agreement, he would not have set it out in detail in correspondence, both in March and also in July and August when Srl's letters were laying the ground for termination. This conclusion is not altered by the reference to Omnitron's activities as a breach in the minutes of a meeting of the Srl directors on 11 September 2002.
117. I am also unconvinced by Mr Gargani's explanation for the draft entry for the gas detector in the international catalogue sent to Mr Strafino. I am satisfied that at the meeting in Lucca on 22 January 2002 Mr Kirby and Mr Strafino showed the sample to Mr Gargani, that he arranged for it to be photographed and that he sent the entry to Mr Strafino for proof-reading because he knew that Mr Strafino and Mr Kirby had introduced it to him.
118. Far from regarding it as unfair competition, Mr Gargani was from 22 January 2002 fully aware of Mr Kirby's involvement with the gas detector and raised no point on it.
119. Srl relies on article 7 para 2.1.2 and article 8 para 4.1.8 as grounds for terminating the franchise agreement. Under article 7 para 2.1.2, it was Limited which agreed not to compete with Srl. It is not a covenant against competition by Mr Kirby. Omnitron and, after the share sale agreement, Limited were under the common control of Mr Kirby. That does not entitle Srl to treat Limited and either Mr Kirby or any other company controlled by him as one and the same. Omnitron had been formed and had started to distribute the gas detector before TSS acquired Limited. It plainly was not a nominee for Limited before the acquisition and there is no basis for saying that it later became a nominee for Limited. There is no evidence of any change in the way it was run or carried on business. All that changed was that Limited was added to the list of companies controlled by Mr Kirby.
120. Srl submitted that Omnitron was just a convenient vehicle through which to channel the business so that it did not appear to be Limited, but the reality was that it was the office of Limited and employees of Limited that were being used to run this business. While there is evidence that for some purposes Omnitron used the same address as Limited, it is not clear that it ever traded from that address and the evidence establishes that Omnitron used and traded from other addresses. As to employees, it is the case that, at least in relation to the Milan fair, Mr Strafino did some work for Omnitron. The evidence does not show that Mr Strafino or any other employee of Limited managed Omnitron. It had its own director, Paul Massarella, who was not connected with Limited and who was also present at the Milan fair. I accept Mr Kirby's evidence, which was not significantly challenged on this, that Mr Massarella was responsible for the day to day operation of Omnitron. The evidence does nor bear out Srl's submission that Omnitron was a vehicle for Limited.
121. Accordingly, in my judgment, Srl was not entitled to terminate the agreement in September 2002 by reference to the activities of Omnitron in promoting and distributing the gas detector. I should mention that Mr Gourgey accepted that Srl could not rely on the right to terminate under article 8 para 3.1.1, which covers competition not only by the Franchisee but also by its "individual shareholders", because (apart from any other reason) Srl had given no prior written demand for performance as required by para 3.1.

Swale Heating

122. This is the fifth and final ground relied on by Srl as entitling it to give notice of termination in September 2002. It is one of the matters discovered later and pleaded as a basis for the notice of termination, but it is the only one still relied on.
123. The pleaded allegation is that Limited diverted orders received from new customers (not recorded on Limited's database) to TSS. It was originally pleaded that the payments from these customers were deposited by Limited in an account which was separate from the account used for its accounting with Srl, but following further disclosure that allegation was abandoned.
124. The only customer alleged to come into this category is Swale Heating Limited. It placed four orders with Limited between December 2001 and May 2002, with a total value of about £10,000. Swale Heating is a very substantial concern and it would have been a valuable customer for Limited. Mr Strafino had previously dealt with it and went to see its buying manager, Andy Condon, in December 2001.
125. For reasons which are in dispute, Swale Heating's orders were not dealt with in the usual manner, set out in article 6 para 1.5 and article 7 para 3.3. Instead of the customer's name and order being transmitted to Srl and Srl despatching the goods direct to the customer with an invoice printed in Limited's name, Limited transmitted the order to Srl with TSS named as the customer. Srl despatched the goods to TSS with an invoice in Limited's name addressed to TSS. Mr Strafino then himself took the goods to Swale Heating and an invoice was rendered by Limited to Swale Heating.
126. Srl's case is that Limited deliberately concealed Swale Heating as a customer from Srl, as a part of a scheme to build up its own database of customers. The evidence does not show that any such scheme was put into operation as regards any other customers. On the contrary, orders from new customers were placed directly through Srl in the usual way and the prices charged, including those which were higher than the prices shown in the 2000 catalogue, were notified to Srl which included them in the invoices to the customers generated by it.
127. Mr Strafino's explanation for the special procedure adopted for Swale Heating, given in his witness statement and oral evidence, was that Swale Heating was concerned that it would face problems with boiler manufacturers if it was discovered to be buying spare parts from Antares rather than from the manufacturers. Swale Heating was therefore concerned that parts should not arrive in Antares packages which might be seen by representatives of the manufacturers. Accordingly, Mr Strafino put in place the system described above. In this way the goods were delivered from Srl to TSS's premises where they were re-packed in plain boxes and delivered directly by Mr Strafino. There was no concern about the invoices being in Limited's name because they would not be seen by manufacturer's representatives.
128. Srl called Mr Condon as a witness and he denied the explanation given by Mr Strafino. In view of Mr Condon's role at Swale Heating, it is clear that he was the person with whom Mr Strafino was dealing. Mr Condon's explanation, given in cross-examination, was that Swale Heating was dissatisfied with the way in which its first order was handled. It paid by credit card for the full amount of the order when it was placed, but there were delays and three separate deliveries, with separate invoices. Mr Condon complained to Mr Strafino who changed the system to allow for the ordered goods to come to him first. Mr Strafino would fax to Swale Heating an invoice for the goods which he had received, Swale Heating would pay it immediately by invoice and Mr Strafino would himself then immediately deliver those goods to Swale Heating.
129. Limited naturally relies on this evidence of Mr Condon as showing that, whatever the reason for the different arrangement, it was instituted to meet the demands of Swale Heating, a potentially valuable customer. While Mr Condon's explanation fits the facts so far as Swale Heating was concerned, it does not provide a complete explanation for the way in which Limited arranged the business with Swale Heating. Mr Condon's evidence was that the system changed after the first order as a way of dealing with the problems with that order. On that basis the first order should have been arranged by Mr Strafino in the usual way. However, it was not: the first order, like the later orders, were placed with Srl in the name of TSS. The goods in the first order were delivered to TSS and taken by Mr Strafino to Swale Heating.
130. Mr Condon was not challenged either on his denials of Mr Strafino's evidence or on the explanation that he gave. I have no reason to doubt his evidence, which I accept, and reject Mr Strafino's explanation for the arrangements for Swale Heating's orders. I find that the likely explanation for those arrangements was that Mr Kirby and Mr Strafino hoped that Swale Heating would become a major customer and that they did not want Srl to have direct contact with it or even know about it.
131. Srl say that it was Mr Strafino who first drew their attention to these dealings with Swale Heating. By way of background, Mr Strafino left Limited in July 2002 and started his own heating and plumbing spares business. He had dealings with Srl in the autumn of 2002 and by January 2003 was in discussions with a view to running the UK franchise. He had many telephone conversations and some meetings in Lucca with Mr Gargani and others at Srl. Srl has given evidence of a telephone conversation on 16 January 2002 between Mr Strafino and Thomas Murray, a non-practicing Scottish solicitor then working for Srl. Mr Murray has played an odd part in these proceedings. He gave a statement for Srl in December 2003, later gave a statement for Limited and then refused to give oral evidence for either party. Limited has not sought to use the statement which he gave to it, but Srl has adduced his earlier statement as hearsay evidence under the Civil Evidence Act. Limited accepts that the statement is admissible but does not accept the truth of its contents and submits that it should carry little or no weight.
132. The significance of Mr Murray's statement in this context lies in a note of the conversation on 16 January 2003 which he says was made soon after the conversation finished. With Mr Murray during the conversation was Roberto Piccioni, who has acted as a consultant to Srl since September 2002. Mr Piccioni speaks English and he gave oral evidence. His evidence is that the conversation was conducted in Lucca on a speaker-phone and he heard all that was said. Mr Murray was making notes during the conversation and Mr Piccioni made some sketchy notes in a mixture of Italian and English which were produced in evidence. His evidence is that Mr Murray's notes are accurate.
133. The notes contain the following passage:

"Strafino, without prompting then went on to reveal some very interesting information regarding Kirby's plans.

He stated that Kirby's intention was to cut Gargani out of the picture altogether. Kirby and Strafino came out to Italy with the intention of finding who Gargani's suppliers were. The intention was to obtain supplies directly from the source and to hold those in stock in the UK (what they were going to do about the products actually manufactured by Antares I don't know) and to deliver them from there to customers. These products were being bought by Total Spares with the intention that Ltd could then become independent of the Franchise. He cited the case of a particular customer called Swale Heating. Strafino is of the view that we would not know about this customer because whenever a new customer was obtained, that customer was put on to a new database, not the Antares one and that new database was to be the basis of the way in which the Company would operate in the future. Anyway Swale Heating was a big customer requiring substantial parts. Total Spares bought in the necessary products for this customer stored them in their warehouse. When an order was received for these products, Martin Dawkins would prepare invoices and packaging in the name of Antares and Strafino would deliver the products to Swale Heating in his car. The money would be deposited straight into the account of Antares Ltd which was a separate account from that used for the transactions with Srl and which was held at Lloyds Bank."

Mr Piccioni's brief notes contain the following (as translated):

"Find the supplier out of Gargani

Buy directly from the supplier Antares over create a parallel market."

I accept Mr Piccioni's evidence that the passage quoted above from Mr Murray's note accurately summarises what Mr Strafino said. It does not of course follow that everything which Mr Strafino said is itself accurate. It is clear that what he said about the separate account is wrong. Nonetheless I find that it indicates the correct explanation for the unusual way in which Swale Heating's orders were treated.

134. Srl also alleged that the goods covered by one invoice to Swale Heating were not supplied by Srl but, in breach of the franchise agreement, were obtained from another source. It accepts that all the other goods sold to Swale Heating were supplied by Srl and there is no evidence or allegation that any other customer was ever supplied from other sources. It is not suggested that the goods in question were not available from the Antares' catalogue. Mr Strafino denied that the goods had been bought from a different supplier. The only evidence to support the allegation is that no invoice for these goods from Srl to Limited has been found. This is not a sufficient basis for the allegation, which I reject.
135. In the result, therefore, I find that a decision was taken to conceal Swale Heating as a customer from Srl and for that purpose to raise orders through TSS. This represented a breach by Limited of its undertaking in article 6 para 1.5:

"to collect orders from customers and to transmit them over the computerised system provided for use in accordance with procedures to be agreed"

and the similar obligation in article 7 para 3.3, which deals in detail with the procedure for dealing with orders:

"The Franchisee will be required to enter orders on to the "Client Server" on every occasion it receives an order."

136. Srl submitted that Limited's conduct constituted breaches of article 7 paras 2.1.1, 2.1.2, 2.1.4 and 5.1.2. Article 7 para 2.1 contains a series of obligations in wide terms which, as stated in the opening part of para 2, are designed to protect the image and general functioning of the Antares network. Para 2.1.1 requires a franchisee:

"To use the services and activities forming the subject matter of the agreement, the operational resources, the techniques and technology, the methods and the procedures expressly indicated in the operational manual."

The operational manual is not relevant to Srl's submission. While a failure in a few instances to use fully the ordering procedure set out in detail in the agreement breaches article 6 para 1.5 and article 7 para 3.3, it would not in my judgment also constitute a breach of para 2.1.1 which suggests a more general departure from the "services and activities forming the subject matter of the agreement". In any case, it does not assist Srl because a breach of para 2.1.1 is not an event entitling it to give notice of immediate termination under article 8 para 4.

137. A breach of article 7 para 2.1.2 is specifically referred to in article 8 para 4.1.8 which, in the certified translation, reads as follows:

"Should the Franchisee's ownership or company structure be varied without compliance with the provisions of article 7 points 2.1.2 and 2.1.3."

Read literally, this makes no sense because there is no possible connection between a franchisee's ownership or company structure and the provisions of article 7 paras 2.1.2 and 2.1.3. I accept the submission of Mr Gourgey, which was not seriously resisted by Mr Ralls, that para 4.1.8 contains three separate events entitling Srl to give notice of termination: variation in the franchisee's ownership or structure, a breach of article 7 para 2.1.2 and a breach of article 7 para 2.1.3.

138. Article 7 para 2.1.2 contains the franchisee's undertaking:

"Not to exercise personally itself or through an intermediary activities which are identical or similar to those forming the subject matter of the agreement or, in any case, which are in competition with those carried out by the Franchisor or other franchisees forming part of the network."

139. The ordering of goods for Swale Heating through TSS does not in my view involve a breach by Limited of this paragraph. It was not competing with Srl or engaging in some form of parallel franchising operation. It simply inserted TSS in the ordering process for Swale Heating's four orders in order, as I have found, to conceal its name from Srl.
140. Nor do I think that Srl can establish a breach of article 7 para 2.1.4 which requires Limited:

"To use the greatest diligence and propriety in the distribution of the products to its customers, safeguarding the image and efficiency of the distribution network."

This paragraph is aimed at the impact, on customers, of the way in which products are distributed. If badly done, it will damage the image of the Antares network. The distribution of products to Swale Heating was not generally inefficient and, on Mr Condon's evidence, the second and subsequent orders were distributed in a way designed to improve the service to the customer. Again, in any case, a breach of this paragraph is not a specified event in article 8 para 4.

141. Srl also argues that it was a breach of article 7 para 5.1.2, dealing with accounting systems, which I have already considered above. In my view, this paragraph is dealing with the systems and methods to be used, while article 7 para 3 is dealing with the information to be loaded on to the system. The meaning of para 5.1.2 need not be stretched to include the latter and accordingly there was in my judgment no breach of para 5.1.2. Again, for the reasons given when dealing with Srl's case on the accounts, a breach of article 7 para 5.1.2 would not fall within article 8 para 4.1.11.
142. Apart from article 8 para 4.1.11, Mr Gourgey submitted that Srl was entitled to give notice of termination by reason of para 4.1.5 or 4.1.6. Para 4.1.5 is aimed at conduct which has "a negative influence on business or on the name or trademark of the agency and hence, on the Franchisor". As Mr Gourgey realistically accepted, it is difficult to say that the way in which the Swale Heating orders were processed had a negative influence either on business or on the name and trademark of the agency. In my judgment, Srl cannot rely on this paragraph. Para 4.1.6 entitles Srl to give notice of termination:

"Should the original design of the ANTARES franchising system be amended by the Franchisee without the Franchisor's approval."

This is expressed in very general terms and, given the detailed selection of particular provisions in the agreement as a basis for immediate termination under article 8 para 4, it cannot be the case that particular instances of breaches will necessarily constitute an amendment of the franchising system within the meaning of this paragraph. The five Swale Heating orders formed a very small part of Limited's business with Srl. Routing the orders through TSS was a failure to operate the system in a particular respect on those five occasions. They cannot in my judgment be characterised in this context as amending the system.

143. I conclude therefore that Limited's handling of the Swale Heating orders cannot be used by Srl to justify its notice of termination in September 2002.

Conclusion on notice of termination in September 2002

144. I therefore conclude that although in certain respects Limited was in breach of the agreement in the period up to September 2002, none of them entitled Srl to give notice of immediate termination. Accordingly, Srl was itself in breach of the agreement in doing so.

Notice of termination 5 December 2002.

145. On the basis that its notice of termination dated 13 September 2002 was not validly given, Srl relies on the further notice of termination given by letter dated 5 December 2002. In that letter it listed five grounds for the termination, but Srl relies now on only one of them and also on an additional ground. The surviving ground is that Limited affirmed the agreement, most obviously by seeking and obtaining the injunction from Park J on 18 October 2002, but thereafter failed to carry on the franchise business at all. It submitted that this complete failure to perform any obligations under the agreement entitled Srl to give notice of immediate termination under article 8 para 4.1.5. The additional ground is that from mid-September to mid-December 2002 Limited, acting through Mr Kirby, orchestrated and implemented a campaign of nuisance telephone calls both to the lo-call numbers and to Srl's switchboard in Italy, designed to and having a disruptive effect on Antares business both in the UK and elsewhere.

Failure to carry on business

146. On the basis that Srl was not entitled to give its notice of termination dated 13 September 2002, Srl's actions in diverting calls to the lo-call numbers to its offices in Lucca, terminating Limited's internet link to Srl and refusing to deal with Limited constituted a clear repudiatory breach of the franchise agreement. Limited was then fully entitled to accept the repudiation, terminate the agreement and bring a claim in damages against Srl. It chose instead, as it was of course entitled to do, to affirm the agreement and seek to keep it in being. It made its position clear immediately in a letter from its solicitors dated 17 September 2002. With no substantive response from Srl or resumption of business by Srl, Limited served on 11 October 2002 an application notice with supporting evidence for an injunction restraining Srl from acting in breach of the agreement. At the hearing on 18 October 2002, Limited applied for and obtained an injunction designed to keep the agreement in being. It is common ground that Limited had thereby affirmed the agreement.
147. The legal consequence of Limited's decision to affirm the agreement was that both parties remained bound to perform their continuing and future obligations under it, and Limited could not rely on prior breaches by Srl to terminate the contract. If Srl thereafter committed a repudiatory breach of the agreement, Limited would be entitled to accept it and terminate the agreement, but again until it did so the agreement would remain in force. Equally, Limited was obliged to perform its obligations and a breach of contract by it would entitle Srl to terminate the agreement in accordance with the previsions of article 8. Even if Srl were itself in breach of the agreement after 18 October 2002, Srl would be entitled to rely on a breach by Limited to terminate the agreement, unless Limited had first treated Srl's breach as repudiatory and terminated the agreement: see Chitty on Contracts (29^th ed. 2004) Vol. 1 paras 24-0015 and State Trading Corporation of India v M. Goloditz Ltd [1989] 2 Lloyd's Rep. 277. Limited does not challenge these principles. However, a party will not be entitled to terminate a contract if there exists lawful reason for the other party's failure to perform its obligations: see Chitty para 24-012. Limited submits that the terms of a letter dated 21 October 2002 to it from Srl, setting out the basis on which Srl would resume dealings with Limited following the grant of the injunction, were such as to provide a lawful reason for Limited's failure, or inability, to resume business.
148. Because of the importance of the letter to Limited's position, I set out the English translation in full, adding paragraph numbers for convenience:

"1. With reference to the proceedings of the "ad interim" injunction established by the judge, even maintaining our reservations in relation to the jurisdiction, we would like to inform you of our wish to comply in such regard.

2. Therefore, having considered that BT recognises us as sole proprietors of the "Lo-call" numbers we would like to know in compliance with the franchising contract what are the support numbers on which we should direct the calls of such numbers.

3. We would like to specify that such telephone lines must belong to Antares Limited as provided by the franchising contract and not to third parties.

4. As our company is responsible and guarantees payment of the bills to BT we believe that Antares Limited should guarantee or provide payment for the forecasted traffic at least one month in advance on a statistical basis of the previous operative months that amounts to 400 € (four hundred).

5. For such purpose we have already informed BT so that it makes itself available for the transfer.

As soon as you have communicated to us which are the support numbers of such lines, justified that the latter belongs to Antares Limited and paid in advance or guaranteed the costs of at least one operative month, we shall immediately provide to give instructions for the transfer of the "Lo-call" numbers to BT.

6. In order to avoid the repetitive payment reminders of the past for the materials supplied we would like the complete respect of our formalities of payments provided for in the franchising contract; the goods must be paid for as provided by art. 5, paragraph 2, before delivery by bank transfer to our bank: Cassa di Risparmio di PI, Lucca branch, IT03 B062 5513 700C C037 0177 498.

7. We must also be informed of which haulier must be entrusted with the collection of the materials at our warehouse in Lucca as provided by the franchising contract in art.7, paragraph 3.3.4.

8. With regard to the loading of the orders we would like to point out that in the meantime we have carried out important modifications to our administrative software for which training sessions for Antares Limited personnel are necessary at our branch in Italy.

As our company is responsible for the training of personnel in accordance with the modalities provided by art. 6 paragraph 3, we must establish a mutually-convenient date for both of us to hold such training courses that are estimated to last about 2 days. Our availability is possible for Week 46 to be confirmed 5 days before. It is indispensable that the person (or persons up to a maximum of 2) speak Italian or have an interpreter.

9. For the moment the orders can be sent by e-mail on "Excell" electronic spreadsheets in the formalities to be agreed over the telephone.

10. With reference to what was established by the judge we also undertake not to refer that European Plumb Direct as the only affiliate of Antares Srl but is simply a new affiliate of Antares Srl.

11. We also undertake to prevent on the basis of the contract that European Plumb Direct spreads the news of being the only affiliate in the UK but only a new affiliate of the trademark Antares Srl.

12. We remain at your disposal for any further queries or clarifications in this regard."

149. There was no response to this letter. Limited did not resume the franchise business. It was after Srl's notice of termination dated 5 December 2002 that Limited, through its solicitors, stated that the terms of the letter dated 21 October 2002 made it plain:

"that your client, rather than intending to proceed with the franchising agreement, wished our client as a condition of transferring the lo-call numbers back to our client to agree terms that were totally different to the terms of trading contained within the franchising agreement. Further, the proposed agreement involved our client accepting that they no longer had any exclusive right to the UK territory."

150. There are several paragraphs in Srl's letter to which Limited could not properly object, and for the most part did not object. Paragraphs 2, 3 and 6 were in line with the terms of the franchise agreement. In evidence, Mr Kirby said that he objected to paragraph 7 because it seemed to negate the existing arrangements under which orders from the UK formed part of loads transported by a single carrier. He agreed, however, that if Limited had stated that it wished those arrangements to continue, there is nothing in the letter to indicate that Srl would not agree.
151. Mr Kirby objected to paragraphs 8 and 9. He rightly said that the internet link to Srl was a vital element in the effective running of the business and that the temporary proposal in paragraph 9 was an unsatisfactory alternative. However, it is the case that since mid-September Srl had made important changes to its software and that Limited's operators would need training. Until the training had taken place, Limited had no suggestion for a better alternative to the proposal in paragraph 9. Mr Kirby objected to the suggestion that training should not take place until week 46 (i.e. the week commencing 11 November 2002), but he made no enquiries for an earlier date. Nor could he object that the requirement that the trainee(s) speak Italian or have an interpreter was a breach of the franchise agreement,
152. Mr Kirby took the strongest possible exception to paragraphs 10 and 11. His view, rightly as I have held, was that Limited had a sole exclusive franchise for the UK under the agreement. He regarded it as unworkable, as well as fundamentally contrary to the arrangements established by the agreement, to have a competing franchisee in the UK, especially when the competitor was controlled by Srl.
153. His evidence was also that the main purpose of the injunction was to stop EPD trading. As a practical matter, the terms of the injunction would certainly make it very difficult for EPD to trade to any great degree, the reason being that the 0845 numbers would be diverted to Limited. The injunction did not restrain EPD from carrying on business, but only restrained Srl and EPD from informing customers and prospective customers that EPD was Srl's only franchise in the UK. I was told by Mr Ralls, who made the application to Park J, that the injunction was deliberately framed in that way, following argument at the hearing. The judge understandably considered that it would be wrong at an interim stage to prevent EPD trading as a franchisee. Nonetheless, Limited preferred an injunction in those terms, thereby keeping the franchise agreement on foot, rather than accepting Srl's repudiatory breach and terminating the agreement.
154. This does not, of course, stop Srl's conduct in dealing with EPD as a franchisee from being, as it was in my judgment, a repudiatory breach of the agreement. Limited was therefore free at any time after receipt of Srl's letter of 21 October 2002 to terminate the agreement and apply for the discharge of the injunction. In my judgment, however, it did not provide a ground on which Limited could legitimately refuse to perform the agreement, if it did not choose to terminate it. Provided that calls to the 0845 numbers were diverted to Limited and provided that Srl obeyed the other terms of the injunction, Limited would not be prevented from carrying on the franchise business and it is hard to see that very much business would go through EPD. To the extent that any business did go through EPD, Limited would be entitled to claim damages against Srl and EPD.
155. Performance by Limited of its obligations under the agreement required the reinstatement of the arrangements for the diversion to Limited of calls to the 0845 numbers. As Mr Gourgey put it in his submissions, it was "key to the control of the business…. This is inevitably the case where the business is driven by the catalogue and the catalogue gives the lo-call numbers as the means of contact". Srl was obliged by article 5 para 2.1 to "grant telephone and fax numbers and E-mail addresses on an exclusive basis" to Limited, although they would remain registered in the name of Srl. As to payment of the charges for the use of the numbers, article 5 para 2.1 provided:

"No fee is required from the Franchisor to the Franchisee for this free loan. The Franchisee will only be required to pay the Franchisor the real costs charged by the telephone company for actual consumption effected by the Franchisee.

The Franchisor will also invoice the Franchisee, on the normal conditions applied to it, for the charges and only those amounts paid to the telephone company for the service and use of the lines."

156. In paragraph 4 of its letter dated 21 October 2002, Srl stated that it believed that, as it was responsible for payment of the bills on the 0845 numbers to BT, Limited should "guarantee or provide for payment" at least once a month in advance at a rate of €400. In paragraph 5, it made payment in advance or the guarantee of such amount a condition of instructing BT to divert calls to the 0845 numbers to Limited. Mr Gourgey for Srl accepted that Srl had no right under the agreement to require such advance payment or guarantee. The position is therefore that Srl, in breach of the agreement, imposed this requirement and made it a condition to performance of its obligation. The imposition of such a condition in contravention of the agreement is as much a breach of contract as an outright refusal to perform the obligation.
157. It was said on behalf of Srl that Limited did not respond to challenge this condition, that it was not the reason why Limited did not resume business and that €400 is a very small amount of money. It does not seem to me that Limited was under any duty to challenge the condition, but was entitled to take the letter at face value. As to the reason why Limited did not resume business, I am satisfied on the evidence that it was the letter as a whole which dictated Limited's attitude. I have no doubt that the principal element was that Srl would continue to deal with EPD as a franchisee, but equally I am satisfied that it is not possible to separate out the other contents and say that they played no part in Limited's decision. Objection to the imposition of this condition is not something which was raised only at trial, but was specifically mentioned in a letter dated 11 December 2002 from Limited's solicitors and in a witness statement made by Mr Kirby on 12 December 2002. The small amount of the sum demanded is relevant evidentially to its effect, if any, on the reasons for Limited's conduct, but it does not alter the basic position that, in breach of contract, Srl was refusing to reconnect Limited without payment of the advance.
158. In general, while the agreement remained in being, breach by Srl would not excuse a breach by Limited. The position is however different if performance of Srl's obligation is either a condition precedent to performance of the obligation of Limited, or is necessary to enable Limited to perform its obligation. This position was considered by Kerr LJ (with whom Lloyd and Butler-Sloss LJJ agreed) in State Trading Corporation of India Ltd v M. Golodetz Ltd [1989] 2 Lloyd's Law Rep. 277 at 286 in terms which in my view are applicable in this case:

"If A is entitled to treat B as having wrongfully repudiated the contract between them and does so, then it does not avail B to point to A's past breaches of contract, whatever their nature. A breach by A would only assist B if it was still continuing when A purported to treat B as having repudiated the contract and if the effect of A's subsisting breach was such as to preclude A from claiming that B had committed a repudiatory breach. In other words, B would have to show that A, being in breach of an obligation in the nature of a condition precedent, was therefore not entitled to rely on B's breach as a repudiation."

The same point is made in Chitty at para 24-012:

"Nevertheless, it may be that there are certain circumstances in which the innocent party may be released from performance of one or more of his obligations under the contract, notwithstanding the fact that he has not accepted the wrongdoer's repudiation….Secondly, where the repudiating party, by means of a breach of contract or other default, prevents the innocent party from performing his obligations under the contract he cannot rely upon that non-performance to reduce or eliminate his liability."

This principle applies in this case. Performance by Limited of its obligation to carry on the business of marketing and selling Antares products was dependant on the prior performance by Srl of its obligation to connect Limited to the 0845 numbers. In breach of contract, Srl refused to connect Limited save on terms which it had no right to impose.

159. Accordingly, I conclude that Limited was not in breach of the agreement by not carrying on the franchise business after 18 October 2002 and Srl was not on that ground justified in terminating the agreement by its letter dated 5 December 2002.

Nuisance calls

160. The other ground on which Srl submits that it was entitled to terminate the agreement in December 2002 is its allegation that between mid-September and December 2002 Limited, acting by Mr Kirby, orchestrated a campaign of nuisance calls to the lo-call telephone and fax numbers, Srl's telephone numbers in Lucca and the mobile telephones of officers of Srl.
161. This raises serious issues of fact, involving the credibility of the evidence of Mr Kirby and Mrs Beedell. It is convenient here to deal with allegations of forgery which were made in these proceedings by Limited in connection with dealings with the lo-call numbers.
162. It is clear from article 5 para 2.1 which I have already quoted that, although Srl was to make the lo-call numbers available to Limited, in the sense that all calls to those numbers would be diverted to numbers specified by Limited, they belonged to Srl and were to remain in its name.
163. Following the acquisition of Limited by TSS in November 2001, Mr Kirby arranged for the lo-call numbers to be transferred into the name of JI Services Limited, which, as I have found, was controlled by Mr Kirby. This was carried out by Mr Strafino and Mrs Beedell, and took effect on 19 December 2001. By way of justification, Mr Kirby relies on the discussions with Mr Gargani in February 2001 in which, Mr Kirby says, it was agreed by Mr Gargani that the numbers would be transferred to Limited. I do not accept that this was agreed by Mr Gargani, and in any event any such discussion was in the context of a proposal for a new franchise agreement, rather than simply an acquisition of Limited with the franchise agreement continuing in force.
164. Srl became aware of the transfer of the numbers in early February 2002. There is in evidence a copy of a letter dated 5 February 2002 from Srl to Mr Strafino at Limited taking issue with the transfer. Mr Strafino gave evidence that he had no recollection of receiving it and that he feels sure that he would remember it if he had received it. Limited challenged the document. I am satisfied on the evidence that this letter was sent, and the probability is that Mr Strafino received it. It is not open to challenge that on 5 February 2002 Srl sent a fax, followed by a letter dated 5 February, to BT requiring the re-transfer of the numbers to it. The letter, and the fax as appears from a note written on it, were sent again to BT on 26 February 2002.
165. The numbers were re-transferred to Srl in April 2002, with the call diversions to Limited's telephone and fax continuing unchanged. There are a number of documents before the court relating to the transfer in April, comprising faxes and letters between Limited, Srl and BT. There is no dispute about the faxes and letters from Srl to BT. However, in witness statements in support of applications to the court in December 2002 and February 2003, Limited alleged that the faxes and letters purporting to come from it had been forged. Some of them were signed by "Vicky" and Mr Kirby in his statement dated 12 December 2002 stated:

"I can confirm that neither Antares Limited nor JI Services Limited have ever employed a person by this name and there is at page 46 a copy of a letter from our accountants and auditors confirming the truth of this statement. At page 47 of the Bundle is a copy of the P35 for Antares Limited. Accordingly I believe that the documents allegedly signed by Vicky are forgeries prepared in connection with this litigation."

166. In various statements, Mrs Beedell confirmed that neither Limited nor JI Services Limited had ever employed anyone called Vicky. She also stated that she had no contact with BT during April 2002 in relation to the lo-call numbers and had not signed or previously seen a fax dated 19 April 2002 purporting to be a fax from her to BT. In a statement in support of an application for summary judgment, Mr Kirby asserted that the fax dated 19 April 2002 was a fabrication. In December 2002, there was also put before the court a statement of Victoria Goss, in which she stated that for a few months up to October 2001 she did some temporary work for the IT manager of CRHS Limited and that she may have been involved in correspondence with BT but only up to the time that she stopped working for him. She denied writing or signing four undated handwritten letters addressed to "Sonia", or signing certain receipts and letters apparently signed by "V. Goss" or "Vicky".
167. Mr Kirby's allegations of forgery were repeated by him in his witness statement for the trial and he repeated his denial that anyone called Vicky Goss had ever been employed by Limited or, as far as he knew, JI Services. In their statements, Mrs Beedell and Mr Strafino repeated their earlier evidence, with Mr Strafino adding that he had never heard of her until these proceedings. However, there was no witness statement from Vicky Goss for the trial and she was not called by Limited to give evidence. Nor was there any expert handwriting evidence in relation to Mrs Beedell's signatures, as had been foreshadowed in earlier statements by her and Mr Kirby. When opening the case, Mr Ralls said that he would not be inviting me to conclude that the letters purporting to be signed by Mrs Beedell were forgeries.
168. Mr Gourgey unsurprisingly cross-examined them on these matters. In his closing speech, Mr Ralls accepted that Mr Gourgey was fully entitled to deal with them. Mr Kirby maintained his allegations strongly. He had never heard of Vicky Goss until the documents with her apparent signature were produced in this action. He then made inquiries and found that for a few months up to October 2001 she had done some work for Omnitron (not CHRS, as Miss Goss had said in her statement). When asked why she was not giving evidence, he said that he had no idea. He suggested that Srl had used Vicky Goss's name because they saw it on documents provided by BT but, when Mr Gourgey demonstrated that all the relevant documents provided by BT were said by Mr Kirby to be forgeries, he could provide no explanation as to how Srl could have obtained her name for the purpose of concocting the documents.
169. In her oral evidence, Mrs Beedell maintained her position that the relevant documents had not been signed by her and were not sent by anyone on behalf of JI Services. She said that the first time she heard the name Vicky Goss was in this case. In cross-examination, Mr Strafino accepted that he did know that someone called Vicky worked for one of the companies controlled by Mr Kirby. It was a name he heard being mentioned, but he did not know her.
170. I am satisfied on the evidence that Vicky Goss worked for companies controlled by Mr Kirby at the relevant times and did send the letters and faxes signed by her.
171. I reach this conclusion for the following reasons. There is no plausible explanation as to how Srl could have heard of Vicky Goss and so use her name, if she did not work after October 2001 for any of the companies under Mr Kirby's control. BT's own internal records, produced as part of its disclosure pursuant to the order made in these proceedings, show that Vicky Goss was involved in the arrangements for the 0845 fax number in December 2001, with her contact telephone number being the same as that recorded for Mrs Beedell. Evidence was given for Srl by Vanessa Bayes, who runs a company which was a regular customer of Limited. On 13 September 2002 she faxed an order to Limited and received a telephone call from a woman identifying herself as Vicky, saying that Miss Bayes had got some of the codes wrong. She asked Miss Bayes to call back on 0208 697 9007, which is obviously one of the sequence of numbers used by JI Services and associated companies. She produced a contemporaneous note. On 16 September 2002 she spoke to "Majid", who was obviously Majid Raja, the only direct employee of Limited after Mr Strafino left, and she was told to deal with "Peter, Vicky or himself and contact them on the new number given to me by Vicky." In answer to a question in cross-examination, she said that she usually dealt with Majid or Vicky at Limited. None of this evidence was challenged.
172. There are other documents apparently signed or sent by Vicky Goss. There are several postal receipt forms for letters sent by Srl to Limited in August 2002 signed "V.I. [or L] Goss." There are also two letters from "Vicki" to Mrs Ercolini faxed on 3 and 9 September 2002. The fax header shows them as sent from 000000, which also appears on other faxes indisputably sent by Limited.
173. In the course of the trial, the liquidator of JI Services made available extracts from its cash book for May 2002 which records that two wages payments (£1382.43 and £1042.43) were made payable to "V. Goss"
174. Finally, the note of the telephone conversation on 16 January 2003 between Mr Strafino and Thomas Murray includes the following:

"We then moved on to discuss the personnel at Antares Ltd. Strafino indicated that Kirby could well get away with saying that Vicky was never employed by Antares Ltd. He believes that to be technically correct but she did do work for the Company during the entire period that Strafino was there. She would answer telephones, make calls to customers and generally act in the same way as an employee. Strafino points out that when he and Majid left the office the telephones were staffed by Jackie Beedell and Vicky Goss."

175. Mr Piccioni's brief notes of the conversation refer to a discussion about Vicky Goss. I have already found that Mr Murray's note is accurate as regards the discussion concerning Swale Heating and I find that the above-quoted passage about Vicky Goss is also an accurate summary of the conversation.
176. Against all this evidence, there is no reason to suppose that the letters and faxes from Vicky Goss are anything but genuine. I am satisfied that, contrary to her evidence, Mrs Beedell knew that Vicky Goss worked for JI Services, Limited and other companies controlled by Mr Kirby and that these letters and faxes were genuine. I also conclude that Mr Kirby knew the true position about Vicky Goss. Even if he was originally unaware of her, which is less than likely, it is not credible that by the time of the trial he was unaware of her involvement and I found his evidence on this issue particularly unpersuasive.
177. My findings in relation to Mrs Beedell's evidence concerning Vicky Goss have a direct bearing on her evidence that her apparent signature on various letters was neither hers nor written with her authority. Faxes from Vicky Goss and letters apparently signed by Mrs Beedell are integral parts of the same correspondence in April 2002. On 18 April 2002 and three times on 19 April 2002 Vicky Goss faxed to Mrs Ercolini copies of faxes from JI Services to BT apparently signed by Mrs Beedell, and on 22 April 2002 she faxed to Mrs Ercolini a copy of a fax from BT to Mrs Beedell.
178. There is further evidence to demonstrate that the faxes with Mrs Beedell's apparent signature were genuine and were sent by JI Services. First, the documents disclosed by BT include a fax dated 22 April 2002 from BT to Mrs Beedell at JI Services, which confirms the change of ownership of the 0845 numbers. Mrs Beedell confirmed that the fax number to which the fax was to sent belonged to JI Services but said that she never saw the fax, although she would have done if it had been sent. I am satisfied that it was sent to her and that she did see it.
179. Secondly, as with the faxes dated 3 and 9 September 2002 from Vicky Goss to Mrs Ercolini, to which I have referred, many of the headers on faxes to both BT and Srl show the sender as 000000, a number undoubtedly used by Limited. Moreover, each fax transmission is given a serial number. For example, the fax timed at 16:25 on 18 April 2002 from JI Services to BT is number 955 and the two-page fax from Vicky Goss sending a copy to Mrs Ercolini, timed at 17:15, is number 956. The first was disclosed by BT and the second, of course, by Srl.
180. Thirdly, for the period from December 2001 to April 2002 when the numbers were registered in the name of JI Services, it was directly invoiced for them by BT. That, of course, stopped in respect of the period after the transfer back to Srl, and from then on Srl regularly invoiced Limited for reimbursements of the charges on those numbers, which were duly paid. I do not accept the evidence of Mr Kirby and Mrs Beedell that they were unaware of this, or Mr Kirby's evidence that he did not understand Srl's invoices but paid them nonetheless.
181. Fourthly, there are two faxes to BT dated 16 and 17 September 2002 apparently signed by Mrs Beedell. Her evidence is that they are not her signatures. Both faxes concern Limited's briefly successful attempt to re-divert calls to the 0845 numbers to its numbers, rather than those substituted by Srl and EPD. There is no conceivable basis on which it could be suggested that Srl had anything to do with these faxes. The first refers to and confirms a telephone conversation which Mrs Beedell accepts that she had with BT. The second refers to the first fax and confirms the re-diversion. It also invites BT to call Limited's solicitor and encloses various documents establishing ownership and control of Limited. Finally it asks BT to note that instructions for the transfer of the numbers should be accepted only from "Mr Martin Dawkins or myself Jackie Beedell." If these letters were not actually signed by Mrs Beedell, they were certainly signed by someone at Limited, JI Services or their associated companies, authorised to sign in her name. Mr Murray's note of his conversation with Mr Strafino on 16 January 2003 records him as saying in relation to the faxes in April 2002 apparently signed by Mrs Beedell:

"He indicated that he did not know if she had signed them or not. If, however, the signature was not hers he would not be surprised by this. He stated that it was common for one person to sign the name of another if that other person was present and something needed to be done quickly. He said that Vicky would not have signed the name of Jackie Beedell on these faxes without the express authority of Beedell or Kirby."

I accept that Mr Strafino gave this account to Mr Murray and I accept that it is true.

182. Although not strictly issues in this case, the evidence of Mr Kirby and Mrs Beedell on the questions of Vicky Goss and the alleged forged documents is important for two reasons. First, the credibility of both of them is central to the issue of nuisance telephone calls in the period September – December 2002. Secondly, Limited relied heavily on their evidence in support of applications made in December 2002 and February 2003. The first was for an injunction restraining Srl from making demand for the instalment due under the share sale agreement on 31 December 2002, conditionally on payment by TSS into the court by that date. The application came before Miss Sonia Proudman QC, sitting as a deputy judge of the High Court, and she delivered a full judgment. It is clear that in granting the injunction until 14 January 2003 the judge placed considerable reliance, as she was invited to, on the evidence suggesting forgery and seeking more time to investigate it. As I understand it, Limited applied to continue the injunction but the application was refused on 7 February 2003.
183. Turning to the allegation of a nuisance calls campaign, there are three principal issues:

i. was there a campaign of nuisance calls;

ii. if so, who was responsible for it;

iii. if Limited was responsible, is Srl entitled to rely on the campaign for its termination of the agreement in December 2002.

184. Evidence was given by Mr Gargani and by three employees of Srl whose duties were primarily answering the telephones at the Lucca offices (two orally and one by a statement admitted under the Civil Evidence Act) as to the campaign of nuisance calls. Virtually none of this evidence was challenged.
185. On 16 September 2002 Srl arranged for calls to the lo-call numbers to be diverted to Srl in Lucca. On 19 September, Wilma Tomei, an English-speaking telephonist and sales clerk, reported that she was receiving a high volume of silent calls on the diverted numbers. The silent calls continued on those numbers and in addition from about 23 September 2002 silent calls started also on the numbers on the main Italian switchboard. These were all analogue lines, which meant that the call would remain connected for three minutes after the Srl operator had ended the call. The high volume of these calls diverted from the lo-call numbers continued until Srl stopped using those numbers in compliance with the order made by Park J on 18 October 2002. The BT bill for diverted calls shows that there was a total of 31,665 diverted calls between 16 September and 18 October 2002, most of them lasting about a minute or less. Calls continued on Srl's own lines until just after the hearing before Miss Proudman QC on 16 December 2002 at which the issue of these calls was raised by Srl.
186. In the case of most calls, the caller did not speak, but talking in English could sometimes be heard in the background. The last call of the day would be made at about 7pm when the male caller, speaking with an English accent, would say "Ciao bella". Another employee, Christina Sassetti gave evidence that although most of the calls were silent she had one conversation with an English male caller along the following lines:

Caller: Do you remember me? Your life would be much easier if you stopped picking up the phone.

Sassetti: My life would be much easier if you stopped calling.

Caller: We will win. We always win especially as the matter is tried by English courts.

There was no challenge to any of this evidence. Christina Sassetti was clear in her oral evidence that all these calls were coming from England.

187. Srl was able to take steps to reduce the impact of the nuisance calls. A "choose to refuse" facility was fixed to the lo-call numbers in early October 2002 which could help to screen out calls coming from numbers known to be generating nuisance calls. Srl switched to digital lines in mid-October and later increased the number of external lines on its switchboard from 20 to 100. The advantage of a digital line is that the call is terminated as soon as the receiver, as well as the caller, ends it. Srl's evidence is that this campaign of calls, by blocking the 0845 numbers, seriously reduced the ability of customers to place orders on those lines. Mr Gargani states the number of orders placed via the lo-call numbers reduced from 25-30 to 5-7 per day. In addition the business of Srl itself was, he says in evidence which again was unchallenged, seriously disrupted, resulting in lost orders and customer complaints. There is no detail of Srl's lost business in evidence nor are any telephone records in evidence for the period after 18 October 2002 to give an accurate picture of the volume of calls.
188. The evidence clearly establishes that a sustained campaign of nuisance calls was waged against Srl from 23 September to mid-December 2002, and against the lo-call numbers from 19 September to 18 October 2002. It is also clear that it was intended to block the lines so far as possible and to eliminate or reduce the business that could be done on those lines. The evidence establishes that the campaign did have an effect on business.
189. The second issue, which is in dispute, is responsibility for the campaign. The timing of the campaign and the fact that it was seemingly conducted from England itself strongly suggests a connection with the dispute between Srl and Limited. The campaign started on 19 September 2002, just after Srl had diverted calls to the lo-call numbers to Lucca, and continued on those numbers until Park J's order on 18 October 2002. It continued against Srl's numbers until just after the hearing on 16 December 2002 when evidence of the calls and their origin was put before the court.
190. More substantial evidence was provided by the telephone companies, pursuant to orders made in November and December 2002. BT disclosed that a high volume of calls had been made to the lo-call numbers between 16 September and 18 October 2002 and to Srl's numbers in Italy between 16 September 2002 and the end of November from a fixed line registered in the name of JI Services Limited. Orange disclosed six mobile numbers from which a high volume of calls had been made, all registered in the name of Mrs Beedell, with CRHS Limited given as the subscriber username. The records disclosed by Orange show a high volume of calls from these numbers to both the telephone and fax lo-call numbers. By way of example only, between 10.35am and 5.30pm on 11 October 2002 a total of 390 calls were made from the Orange numbers to the lo-call fax number. For much of that time the calls were being made at a rate of one per minute. Almost all the calls were made from one number, except for a 20 minute period when it alternated with another of the Beedell numbers. Large volumes of calls were made from the Orange mobile numbers to the lo-call telephone number. For example, on 17 October 2002, a total of 951 calls were made from those numbers.
191. Pursuant to the same order, Vodafone disclosed that a high volume of calls had been made to Srl's Italian numbers from mobile numbers registered in the names of Price Building Contractors (until 13 November 2002) and Steven Price (until 14 November 2002) both of London Road, Halstead, Sevenoaks. Price Building Contractors was the trading name of Price & Sons Limited which went into insolvent liquidation on 26 November 2002.
192. In her witness statements, Mrs Beedell stated that she and other members of staff at CRHS Limited made a number of calls to the lo-call telephone numbers to ascertain where calls were being diverted. They also rang Srl's number to find out what was going on and attempted to send to Srl by fax various complaints and queries received from customers. A large number of calls were later made in respect of further complaints and queries. The number of calls was "certainly not excessive bearing in mind the devastating effect Srl's behaviour had on Limited's business."
193. In cross-examination Mrs Beedell agreed that it only took one or two calls to find out where calls to the lo-call numbers were being diverted and those were made around 20 September 2002. All written complaints and queries have been disclosed in this action. Her evidence continued:

"Q. Aside from those reasons, which are fairly limited reasons for sending through or trying to contact the lo-call telephone numbers, are there any other legitimate reasons why calls were being made to the 0845 numbers or to Srl by –

A. Yes, to find out what was going on.

Q. That did not take more than a few calls did it?

A. When the calls were put down at the other end and you cannot establish what was going on, yes, you need to ring and find out. We were asking for Wilma and Sonia and the calls were always being put down.

Q. I see. Do I understand it this way: if we leave aside the few faxes you sent on and the initial one or two calls you made to find out where the 0845 numbers were being diverted, that all the other calls we see coming from JI Services or from CRHS Limited numbers were calls trying to contact and get in touch with Srl?

A. Yes."

When asked why the BT number registered in the name of JI Services Limited was being used to make a high volume of calls to the lo-call and Italian numbers, Mrs Beedell replied that she did not know. She denied that she and others on Mr Kirby's instruction were making calls from those numbers. She denied that she used any of the Orange mobile numbers registered in her name. When asked about the high volume of calls made from that number to the lo-call numbers on, for example 11 October 2002, her evidence was that it was somebody continuing to try and get an answer from Srl.

194. She said that, although they were getting no answers because the telephone would be put down, they carried on because:

"at the end of the day we just lost the company and we wanted to establish what was going on."

With regard to the large number of calls made from the Orange mobile numbers to the lo-call fax number, she said that she had no idea why anyone would keep making calls from a mobile phone to a fax number.

195. Mr Kirby's evidence in his witness statement is:

"I have explained above how a number of test calls were made to the Lo-call telephone number by Ms Beedell and by members of her staff. In addition several attempted calls were made to find out why Srl were behaving in the manner they were and several other attempted calls were made as a consequence of complaints from Limited's customers. Ms Beedell deals with this issue more fully in her witness statement. This is the extent of the telephone calls made by Limited or on its behalf. I categorically deny that Limited and/or Ms Beedell and/or I generated the telephone calls to which Srl refer or that we caused those telephone calls to be generated."

He goes on to say that the staff employed by Limited and CRHS were told towards the end of September 2002 that because of Srl's actions their jobs were at risk. He continues:

"I am aware that some of those staff felt extremely angry. I am also aware that several of those members of staff were making telephone calls to Srl's offices in an attempt to speak to their opposite numbers at Srl to express their anger.

For my part I did try on very many occasions to contact Sig. Gargani to attempt to open up negotiations to resolve whatever issues he had. I never managed to get through to him."

196. In cross-examination, Mr Kirby said that he tried to call Mr Gargani 40 or 50 times a day to find out what was going on, and that he believes that Mrs Beedell, Majid Raja and anyone else who was available was doing the same. He denied having any responsibility for the high volume of calls to the lo-call and Italian numbers. He did suggest that unknown to him staff took things into their own hands and rang the numbers.
197. I have no hesitation in rejecting the evidence of Mr Kirby and Mrs Beedell. The volume of calls is entirely inconsistent with the explanation put forward by them. They were on a scale which is only explicable as a deliberate campaign to cause damage to Srl and, until 18 October 2002, any business in the UK.
198. The starting and finishing dates of the calls to the lo-call and Italian numbers respectively are not in my judgment coincidental but point clearly to the real nature and purpose of these calls. Mr Kirby's suggestion that the calls were the work of disgruntled staff was unsupported by any other evidence, which if true could easily have been obtained. Mrs Beedell's explanation that she was trying to find out what was happening is inconsistent both with the volume of calls generally and the making of large numbers of calls from a mobile phone to a fax machine.
199. I am satisfied that the campaign of calls was organised by Mr Kirby. There is no doubt that he was fully in control of the various companies associated with him, including JI Services and CRHS Limited, and, having seen both him and Mrs Beedell give evidence, I am satisfied that she would not have made these calls except on his instructions. Apart from the Vodafone numbers, all the numbers were registered to JI Services, Mrs Beedell and CRHS Limited.
200. The Vodafone numbers were registered to Steven Price and his construction company. Mr Price was not called as a witness, although I assume it had been intended to do so because Limited had included a statement by him in the trial bundle of witness statements. There were no billing records in evidence for these numbers. In his oral evidence, Mr Kirby denied that he knew Mr Price or had known of him before these proceedings.
201. Srl has brought proceedings for damages in tort in respect of the nuisance calls against JI Services Limited, Mrs Beedell, Mr Kirby, Price Building Contractors and Mr Price. The only active defendants are the individuals, both companies being in insolvent liquidation. The proceedings were issued in May 2003 and the claim form was served with the particulars of claim. Mr Kirby and Mrs Beedell served a joint defence in June 2003 and Mr Price served his defence in August 2003. Mr Price has made a witness statement in those proceedings, in which he denies knowledge of the calls made to Srl. He says nothing in it about whether he knew Mr Kirby.
202. It is in my view unfortunate that these separate proceedings were not ordered to be heard at the same time as the trial of this action. There is a very substantial factual overlap, with only the alleged involvement of Mr Price being an additional item in the proceedings brought by Srl. The trial could have been timetabled in a way which reduced Mr Price's involvement to the minimum. All the relevant evidence would have been before the court, the risk of inconsistent findings would have been eliminated and there would have been an overall saving in time and cost. Regrettably, Srl did not apply for such an order until January 2004, even then giving only very short notice. In those circumstances, I can understand the Master's decision not to make the order sought. Nevertheless, it would even then have been possible to get those proceedings ready for a trial due to start in May and estimated to last several weeks. There is in my judgment a very strong interest in the facts of what is essentially one course of conduct being decided by the same court in one trial.
203. As it is, it would not be right to make findings as regards Mr Price. I am sceptical about Limited's decision not to call him and it seems an unlikely coincidence that a large number of calls were made from these Vodafone numbers in late 2002. Nevertheless, there may be explanations for the calls or it may be that Mr Price had no involvement in the use of these mobile phones. This does not, however, in any way affect my conclusion that, even leaving these mobiles out of account, Mr Kirby orchestrated a campaign of nuisance calls between September and December 2002.
204. The issues are therefore whether the conduct of Mr Kirby can be attributed to Limited and, if so, whether it entitled Srl to terminate the franchise agreement. Mr Kirby's interest in the franchise agreement stemmed primarily from his position as the controller of Limited. As the shareholder of Limited, TSS had an indirect interest but it had gone into creditors' voluntary winding-up on 24 July 2002, so there can be no question of an attribution of his actions after that date to TSS. As franchisee, it was Limited which had the benefit of the agreement and Mr Kirby's evidence was that the purpose of the calls was so that Limited could find out what was going on. In my judgment, his orchestration of the telephone campaign was undertaken by him in the course of acting for Limited and is therefore to be treated as conduct by Limited.
205. Srl submits that this conduct fell within article 8 para 4.1.5 as "conduct by the Franchisee….capable of having a negative influence on business or on the name or trademark of the agency and hence, of the Franchisor". The "agency" is not a term used much in the agreement, but it must refer to the franchisee (see also article 8 para 4.1.3). Srl submits that jamming the telephone lines is an obvious example of conduct capable of having a negative effect on the UK business, whether it is the lo-call numbers or the Italian numbers. In either case, "Limited's customers, customers of the UK franchise" (as Mr Gourgey put it) would be prevented from making enquiries or placing orders.
206. In my judgment, in referring to "a negative impact on business", article 8 para 4.1.5 is referring to the business being carried on pursuant to the franchise agreement, rather than to Srl's business generally. The subject-matter of the agreement is the grant of a franchise business to Limited in the UK. Any conduct of Limited which is capable of having a negative influence on that business may fall within paragraph 4.1.5. During the period of the nuisance calls, Limited was carrying on no business and was incapable of doing so because of Srl's actions. From mid-September 2002, the 0845 numbers were no longer Limited's numbers, but had been transferred to EPD for use under a new and separate franchise agreement with that company. Those numbers were, in the circumstances which I have considered above, never restored to Limited. The disruption was not to any business carried on pursuant to the franchise agreement. Accordingly, I conclude that Srl was not entitled to rely on the nuisance calls as a basis for termination of the agreement under paragraph 4.1.5 in December 2002. I should add that Srl also pleaded reliance on article 8 para 4.1.6 but I cannot see how it is applicable and it was not strongly pressed by Mr Gourgey. It may be noted that although Srl raised its allegations and complaints with regard to the nuisance calls at the same time giving notice of termination on 5 December 2002 (see its solicitors' letter of that date) it did not rely on it as a ground of termination.
207. This conclusion does not in any way condone the conduct of Mr Kirby in organising this campaign of nuisance calls. It may be that Srl has a good claim in tort against him and others.

Damages

208. On the basis, as I have held, that Srl wrongfully failed to perform its obligations under the franchise agreement between September and December 2002 and that Limited was entitled to terminate the agreement on 11 December 2002, Limited is entitled to damages against Srl for breach of contract.
209. Srl takes as a first point that any damages for future loss must be limited to a period of six months from 11 December 2002, the date on which Limited terminated the agreement. The ground for this submission is that at that date it had the right under article 8 para 1.1 to terminate the agreement on six months' notice by reason of existing breaches of the agreement by Limited. It also submits that there can be no doubt that Srl would have exercised that right. Srl relies on the principle stated by Megaw LJ in The Mihalis Angelos [1971] 1 QB 164 at 209–210:

"In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events."

210. I did not understand Mr Ralls to challenge the principle, but he did of course submit that it had no application in this case because, first, article 8 para 1.1 applied only in cases of serious or substantial breach and, secondly, Limited was not in any event in breach of any term of the agreement as at 11 December 2002. I have however, held against Limited on both these points. I have held that article 8 para 1.1 applies in the case of any breach of the agreement. I have also held that Limited was in breach of its obligations as regards the dealings with Swale Heating, the maintenance of proper accounting records, and up-dating the database. Srl was, therefore, in my judgment entitled as at 11 December 2002 to terminate the agreement on six months' notice. In view of Mr Gargani's attitude to Limited and Mr Kirby, I have no doubt at all that Srl would have exercised this right.
211. For completeness, I should say that Srl advanced, as a further breach on which it said it would have relied, the late filing of VAT returns for the quarter ended 30 November 2001 and a failure to file any VAT for the quarter ended 30 August 2002. Srl had pleaded that the returns for the quarters ended 28 February and 31 May 2002 were also late but it is clear from the returns themselves that they were in time. As regards the other two returns I am satisfied that the late filing of the November 2001 return was at least partly due to the state of the records when TSS took over Limited, for which Mr Gargani and Srl must bear responsibility. Since Limited was in reality run by Srl before then, it is in my judgment relying on its own wrong by putting this forward as a breach of article 7 para 1.1.6. The same is true of the absence of a return for the quarter ended 31 August 2002. I am satisfied on the evidence that Limited was dependent on information maintained on Srl's system which Limited could not access after mid-September 2002 because of Srl's wrongful actions. I therefore reject the allegations of breaches of the agreement in relation to the late filing or non-filing of VAT returns.
212. On the basis set out above, Limited's claim for damages is limited to the period from mid-September to 11 December 2002 during which, in breach of agreement, Srl failed to perform its obligations under the agreement and to damages for loss of profits in the six-month period from 11 December 2002.
213. The evidence on quantum was given by experts instructed by each party. Limited's expert was Richard Thacker FCA and Srl's expert was Andrew Cottle FCA. I accept that each had relevant experience and expertise in the valuation of businesses and estimation of future profits.
214. Neither expert directly addresses the quantification of losses on the basis of a lawful termination taking effect in June 2003. However, there is sufficient evidence in the reports to arrive at a reasonable conclusion on quantum on this basis.
215. Mr Thacker has prepared an estimate of the lost profits of Limited for the period 13 September 2002 to 30 April 2003. This covers the period from Srl's breach to the introduction of a new catalogue. Following revisions in his second report, he estimates a net profit for this period of £11,260. Srl does not accept the figure because it would make some deductions for further overheads. I will consider those points later in the context of estimates of future losses, but at this stage I need say only that I accept the figure of £11,620. There is no claim for expenditure in the period until 11 December 2002 when the agreement was still in force, because Mr Thacker states in his first report that he has assumed that it incurred no costs in that period. If Srl had given six month's notice on 11 December 2002 it is highly unlikely that a new catalogue would have been introduced in the UK in May 2003, during the last weeks of Limited's franchise. The best assumption in my judgment is that profits would have continued at the same rate in the period since 13 September 2002. Accordingly there should be added the appropriate sum to the figure of £11,260 to arrive at damages awarded to Limited for breach of contract by Srl.
216. It follows that I reject Limited's claim for damages for loss of profits over the unexpired term of the franchise agreement to October 2018. However, I heard the evidence and submissions on that claim and I will set out my findings.
217. Mr Thacker's starting point was to estimate the profit lost in the period from 13 September 2002 to 8 April 2004, being the date of his report, and then to estimate the value of future profits from that date. Mr Cottle assesses Limited's loss of future profits as from September 2002, which he takes as the date of termination of the agreement. Apart from correcting the date of September to December, Mr Gourgey submitted that as a matter of law Mr Cottle's approach was correct, although he did not suggest that by itself it would make a great difference to the outcome.
218. I accept Mr Gourgey's submission. The general rule is that damages for breach of contract should be assessed as at the date of the breach, but it is not an absolute rule and, to avoid injustice, the court has power to fix another date: Chitty on Contracts (29^th edition) para 26–057. The Court of Appeal considered this issue in somewhat similar circumstances to the present case in Crehan v Inntrepreneur Pub Co [2004] EWCA 637. It was a claim for damages by a former tenant of two pubs for breach of article 8 of the EC Treaty in relation to beer ties contained in 20-year leases of the pubs. The leases were granted in July 1991 and surrendered in March and September 1993. The judge at first instance held against the claimant on liability but stated that, if liability had been established, he would have awarded damages measured at the date of judgment and comprising (i) the losses actually suffered from 11 July 1991 to the surrender of the leases in 1993, (ii) the profits which the claimant would have made between 1993 and the date of judgment in 2003 and (iii) the value as at 2003 of the leases free of the tie. The Court of Appeal reversed the judge on liability and held that damages should not be awarded as at the date of judgment but as at the dates in 1993 when the claimant surrendered the leases. There was no issue on the award of damages for the period from 1991 to those dates in 1993. The distinction between the date of breach and the date of judgment has rather less significance in the present case where they are less than two years apart. I should add that, in awarding damages on the basis that the franchise agreement would have been terminated on six months notice given in December 2002, any difference between the date of breach and the date of judgment is so small that I have disregarded it.
219. In assessing Limited's loss of future profits, both experts first sought to estimate a figure for its maintainable annual profits but then adopted very different approaches to arrive at a capital value. I will consider later the differences in their estimated maintainable profits, and first consider the fundamental difference in their approaches. Mr Cottle correctly took the view that Limited's only significant asset was its rights under the franchise agreement, and argued from this that there was no difference between valuing its lost rights under the agreement and valuing Limited itself. On either basis, the task was to estimate the price which a willing buyer would pay on a hypothetical sale of Limited or the rights under the agreement, assuming the estimated level of maintainable annual profits. For this purpose he adopted a price earnings analysis and used a p/e ratio of 4–5. As a check, he also conducted a discounted cash flow analysis of those profits over the unexpired term of the agreement, using a discount factor of 22.5% which is within the range which would be required by an equity investor.
220. Mr Thacker explained in his oral evidence that he was not attempting to arrive at a price which an equity investor would pay for Limited or for its future profits under the agreement, but was seeking to estimate the loss to Limited of the profits which it could otherwise have made under the agreement. For this purpose he used a discounted cash flow analysis and used a discount factor of 7%. He chose that factor because the capital of the business was financed by borrowings and a return of 7%, being 3% over base rate at the time of his report, represented a standard bank borrowing rate.
221. In arriving at a net present value of the future profits of a business, there need to be considered both a discount for accelerated payment and the commercial risks associated with the business. Mr Cottle is critical of Mr Thacker's approach on the grounds that it does not sufficiently take account of those commercial risks in relation to a period in excess of 14 years. In particular he referred to the following matters:

"i) a franchise operation has complete dependence on the franchisor for supplies of the product and has only limited control over the pricing and marketing of the product.

ii) The Antares products that Limited sold were prone to substitution and were sold into a mature market where overall market growth was forecast to be relatively stagnant and where growth could only be achieved by increasing market share at the expense of others

iii) The absence of any significant technological or costs barriers to entry meant that Limited or other less established companies may be vulnerable to prospective competitors.

iv) The requirement to purchase in € but sell in £ resulted in Limited's profit margin being at risk to exchange rate fluctuations.

v) The fact that Limited had only been trading within the UK for a period of approximately two years."

I accept these criticisms and consider that Mr Thacker's approach does not give anything like sufficient weight to the many serious uncertainties which would be attached to the franchise over a period of 16 years from 2002. Mr Thacker applied the discount rate to his estimate of maintainable profits for the first seven years from April 2004 and to that estimate less a reduction of 20% for the remaining years. He agreed in cross examination that, leaving aside a discount for early payment, his view was that there should be no discount, or at any rate a low discount, for the first seven years and that the 20% reduction in profits for the remaining years sufficiently reflected the commercial risks.

222. An approach which seeks to arrive at the price which a willing third party negotiating at arms-length would pay for Limited or for the benefit of the agreement will fully reflect the uncertainties of the business. It was for this reason that a similar approach was adopted by the Court of Appeal in Crehan v Inntrepreneur Pub Co.
223. In doing so, the Court of Appeal applied the decision in UYB Ltd v British Railways Board (16 April 1999 unreported), itself affirmed on appeal, which concerned the proper value of a nightclub business over a 25-year term which was never able to open because of the defendant's tort and breach of contract. In his judgment in that case, HH Judge Raymond Jack QC (as he was then) said:

"The resolution is in my view to take a capital value for the hypothetical business at the time at which it became clear that it could not proceed, that is, when it was lost. That is the best reflection of what UYB….. [has] been deprived of. That value should be based on the value which the business would have fetched in the open market at that date. That figure will reflect the fact that the new purchaser would be running the business and taking the risks in place of UYB. It would reflect the market view of the value. It will carry appropriate interest commencing at the date of the valuation"

After citing that passage, the Court of Appeal in its judgment in Crehan continued:

"177. Accordingly, the judge held that the loss was to be measured, first, by an assessment of the profits lost between the date the premises would have opened in October 1992 had there been no water problem and 11 November 1993, secondly, by an assessment of the value of the hypothetical business in November 1993 and, thirdly, by the deduction from that value of such loss as should have been avoided by steps taken in mitigation. An appeal by UYB to this court was dismissed (in an unreported decision on 20 October 2000), Waller L.J., with whom Kennedy and Jonathan Parker L.JJ. agreed, saying that there was no legitimate basis on which UYB could complain as to the quantum of damages awarded. Mr. Milligan submitted that in regard to the first and second stages the assessment made in that case was on all fours with that which ought to be made in the present case. He accepted that, on the judge's findings, no deduction was to be made in respect of steps which could have been taken in mitigation.

178. Mr. Brealey submitted that there were important factual differences between UYB Ltd v British Railways Board and the present case, in particular that UYB's night-club business never got off the ground and would in any event have been of a speculative nature. While we fully accept that each case must be judged on its own facts, we do not think that these and other points made by Mr. Brealey are sufficient to justify a different approach from that adopted by Judge Jack. The approach adopted by Park J, on the other hand, is immediately suspect on one simple ground. He recognised (para. 281) that there must be some scaling down of Mr. Main's figure of £1,045,944 in order to take account of unidentified contingencies. However, we agree with Mr. Milligan that a reduction of only 15% was palpably insufficient to take account of all the uncertainties over a ten-year period. This confirmed, submitted Mr. Milligan, that the judge had approached the assessment of damages from the wrong end. We return to this point below.

179. …The wrong sustained by Mr. Crehan was the loss of his businesses at The Cock Inn and The Phoenix. But, for the purpose of the measuring the damages recoverable, they were not actual businesses. They were hypothetical, in the sense that they had to be treated, contrary to the actuality, as having been free of tie. So they had to be treated, though for a different reason, in the same way as UYB's business. On Park J's approach that faces the court with the immediate difficulty that the measure of damages involves a hypothesis upon a hypothesis: the hypothetical profits of a hypothetical business.

180. …We have already expressed the view that a reduction of 15% was palpably insufficient to take account of all the uncertainties over the ten-year period. We would observe that although the judge took some account of local competition, The Cock Inn and The Phoenix were in an area containing numerous competitors. We respectfully suggest that, while the judge took account of actual developments during the period and made some allowance for something unforeseen going wrong, he did not attach anything like the necessary significance to the various possibilities which might falsify the assumption that Mr. and Mrs. Crehan would carry on business at The Cock Inn and The Phoenix for the full ten-year period, for example, ill health caused to Mr. and Mrs Crehan by the stress of carrying on the businesses for another 10 years or a simple decision by them to sell up and move elsewhere. The imponderables are so great that to adopt Park J's approach would be unduly speculative and thus unfair to Inntrepreneur. We propose to adopt Judge Jack's approach. It follows that we accept Mr. Milligan's submission that the damages should be assessed at the dates in 1993 when Mr. Crehan gave up possession of The Cock Inn and The Phoenix respectively."

224. The damages awarded by the Court of Appeal were on the basis of the price at which the pub leases without the beer tie could have been sold in 1993. Figures for maintainable profits were agreed and a multiple of 2.5 was applied to them. It was a material feature of both UYB Ltd v British Railways Board and Crehan that both the profits and the business were hypothetical. Neither the nightclub nor the pubs without beer ties had ever been operated. That is not quite the case here. The franchise was operated by Limited between late 1998 and September 2002. However, it appears to have made losses or only very low profits in that time. The accounts for the first financial year to 31 December 1999 show a post-tax profit of £3,654 on turnover of £56,648. The abbreviated accounts for the year 2000 show an operating loss of £1,148 on turnover of £817,917. I have not seen profit or loss figures for 2001 up to the time of TSS's acquisition of Limited in November 2001. Srl was supplying some larger customers directly in these periods, and perhaps also after November 2001, but I have no evidence on the impact of these sales. Management accounts for the period from 19 November 2001 to September 2001 have been prepared by the accountancy group in which Mr Thacker is an audit partner. These accounts (the Vantis accounts) show a loss for that period of £7,916 on turnover of £824,374. None of these accounts give any ground for confidence as to the sustainability of Limited's business. In my judgment, it can therefore be treated as analogous to the business in Crehan. The decision of the Court of Appeal in Crehan therefore supports the approach adopted by Mr Cottle is this case. He considers that a p/e ratio of 4 or 5 should be used, which applied to his estimate of maintainable post-tax profits of £56,700 results in a valuation of between £226,800 and £283,000. Using a discounted cash flow approach, he considers that a discount rate of between 20 and 25% should be adopted. A discount rate of 22.5% results in a net present value of £268,000 on his estimate of maintainable post-tax profits. In his evidence, Mr Thacker said that if he were using price earnings ratio to arrive at an open market value of the shares in Limited he would not quarrel with a ratio of 4 to 5. On the facts of this particular case the same must apply to an open market value of the franchise agreement if it were freely assignable.
225. My only misgiving with Mr Cottle's approach is whether it fully takes account of the difference in the position of a potential equity investor, who has a wide choice of investments from which to choose, and Limited which is not making an investment decision but already owns the franchise agreement and its profit-earning capacity. As Mr Cottle remarks in his report:
"5.27 The decision to invest in a franchise does not take place in an investment vacuum. The value that a vendor or purchaser places on that franchise must take into consideration the rates of return arising from alternative investment opportunities."

In the light of the competitive environment for investment, an investor may wish to apply a greater discount to the maintainable earnings than is needed to cover commercial risks and accelerated payment. However, I have no evidence which enables me to quantify this factor, if indeed it is material. There was evidence from Mr Thacker that he regarded Mr Cottle's equity-based discount rate as too high in current conditions, but I have no alternative equity rates for either now or more importantly December 2002.

226. Against this background, I hold that the best way of assessing Limited's lost profits over the remainder of the term of the franchise agreement is to adopt an open market value of the franchise, assuming it was freely assignable, or of the share capital of Limited. I find that a p/e ratio of 5 should be applied to the maintainable post-tax profits. I have no evidence on an appropriate p/e ratio or discount rate for pre-tax profits, so I cannot at this stage approach it on that basis.
227. I turn to the question of maintainable profits. Both experts approach this by estimating gross purchases by Limited from Srl, applying a mark-up to arrive at gross sales and hence gross profits and then deducting estimated overheads to arrive at net profits.
228. In arriving at a figure for annual gross purchases and sales, Mr Thacker explains that the best information available to him was provided by accounting records of Limited from 19 November 2001 to 20 September 2002 and details of goods invoiced to EPD by Srl from October 2002 to December 2003. He did not have available figures for the sales made by EPD, as opposed to its purchases from Srl, for this latter period. For the maintainable purchase figures, he chose the amount invoiced by Srl to Limited for the four months ended 30 April 2002 and the amount invoiced by Srl to EPD for the eight months ended 31 December 2003. He chose to mix and match in this way because (i) EPD's purchase figures for the first four months of 2003 seemed unduly low when compared with Limited's purchase figures for the corresponding period in 2002 and with EPD's figures for the remaining months of 2003, (ii) EPD's purchase figures for September–December 2002 seem very low, no doubt because of disruption connected with the change in franchisee, and (iii) a new catalogue was introduced in May 2003 so that the choice of EPD's figures for May–December 2003 reflected the impact of a new catalogue. The effect of this is to combine the better periods of EPD's trading with the better periods of Limited's trading. It gives a total of £1,079,720 at an assumed exchange rate. On the whole, I consider Mr Thacker's reasons for doing this are sound, except in one respect. For a reason which he cannot explain there was an exceptionally high figure for May 2003. Having taken the better figures for Limited for January to April 2002, and in the absence of any explanation for the figure, I do not think it right to include as high a figure for May. I would reduce that figure by €100,000, or £67,454 at Mr Thacker's assumed exchange rate. This produces a figure of £1,012,266 for maintainable purchases from Srl.
229. Mr Thacker then applied a hypothetical mark-up to these gross purchase figures to calculate gross sales and hence gross profits. In his supplementary report, he concludes that the actual mark-up when the 2000 catalogue was introduced was about 20%. He takes two hypothetical mark-ups following introduction of the 2003 catalogue, of 22.18% and 25%. The latter could be achieved only by higher price increases than he contemplated in his first report. A mark-up of 25% should in my view be rejected. Applying a mark-up of 22.18% results in a gross profit of £239,482 for future years. However, Mr Gourgey demonstrated in cross-examination of Mr Thacker that this involved a significantly higher mark-up than EPD in fact used. Its mark-up was only 10.5%, although this may have been unduly low because Srl was bearing the employment costs. In my judgment, in circumstances where the main Antares selling point was its low prices, it cannot be right simply to take EPD's figures for purchases from Srl and then apply a mark-up which is double that used by EPD, without some allowance for the potential for lower sales. A second difficulty with applying a constant mark-up of 22.18% is that it ignores a particular feature of the Antares franchise, that Limited's selling prices were fixed for two years by the catalogue but in the meantime Srl could increase its selling prices to Limited. Mr Thacker agreed that an adjustment should possibly be made to take account of this.
230. The mark-up shown by the Vantis accounts for the period of 10 months to September 2002 when Limited under Mr Kirby's control was operating the franchise, as adjusted in Mr Thacker's supplementary report, was 16.25%. On the other hand, Mr Gargani stated in a letter dated 31 January 2002 that most franchisees achieved a mark-up of 20–25%. Balancing the capacity to improve mark-up on the introduction of a new catalogue against the factors mentioned in the preceding paragraph, I conclude that the appropriate mark-up to apply is 20%. This also makes some allowance for a possible and unquantifiable increase in sales if Srl had made no direct sales into the UK. Applying that mark-up to a figure of £1,012,226 for purchases from Srl results in a maintainable gross profit of £202,445. This represents a gross profit margin of 16.67%. If credit card charges at 1.67% of sales are deducted, this leaves a figure of £182,160. These figures are slightly larger than those put forward by Mr Cottle.
231. Overheads must be deducted from this figure of £182,160 to arrive at the figure for maintainable net profits. Both experts accept the figures in the Vantis accounts and extrapolate annualised figures from them. Only a few items are in dispute. First, Mr Thacker includes £10,000 for the costs of the catalogue whereas Mr Cottle considers that it should be at least £20,000. Mr Thacker had not taken account of the substantial distribution costs for the catalogue and I accept Mr Cottle's figure of £20,000 pa.
232. Secondly, Mr Thacker excluded management charges, which amounted to £19,484 in the Vantis accounts, on the basis of his instructions that they represented non-recurring consultancy fees for Mr Kirby for the first year of Limited's operation under his control. It is clear from Mr Kirby's evidence that he was likely to continue to be involved in the management of Limited's business, but the extent would depend on how well Mr Strafino, or his replacement, was performing. Mr Thacker made the point that there was no continuing contractual obligation to pay consultancy fees. Mr Kirby's services reflected the type of involvement to be expected of an owner of a business or his representative. The owner is able to choose whether a fee is paid or a dividend is declared or no payment is made so as to allow a greater accumulation of profits. In my judgment, it is probably right to exclude the management charges from a calculation of maintainable profits.
233. Thirdly, neither Mr Thacker nor Mr Cottle took account of call centre costs. Calls were regularly answered by telephone operators employed by JI Services and CRHS Limited and in the normal course their services would be paid for. I do not however have figures on which to make a finding for the appropriate amount. Neither Mr Thacker nor Mr Cottle included a deduction for interest on bank borrowing and I shall not take it into account. Like Mr Thacker, I do not consider that any deduction should be made for sundry bank charges.
234. Fourthly, a sum for motor and travel expenses is included in the Vantis account (£10,750), Mr Cottle's figures (£10,000) and Mr Thacker's figures (£6,606). The figure in the Vantis account represented costs incurred by Mr Strafino and Mr Kirby. Both experts exclude Mr Kirby's expenses and for the reason already given I agree with that approach. I accept Mr Thacker's figure of £6,606 which is based on the costs incurred for Mr Strafino in the period covered by the Vantis accounts.
235. Based on the annualised figures in para 4.39 of Mr Cottle's supplementary report derived from the Vantis accounts, the effect is that overheads amount to £96,000. If this figure is deducted from £182,160, it leaves a pre-tax net profit of £86,160.
236. There is a difference in the treatment of tax between the experts. While accepting that Limited's profits would have been subject to corporation tax, Mr Thacker disregards it because any damages receivable by Limited would also be taxable. Mr Cottle's p/e ratios of 4 or 5 are based on post-tax profits. Assuming corporation tax at 19% on profits of £86,160, Limited's maintainable post-tax profits would be £69,790. Applying a p/e ratio of 5, this produces a value of £348,950.
237. If I had not held that Srl was entitled as of 11 December 2002 to terminate the franchise agreement on 6 months' notice, I would have awarded damages of £348,950 to Limited, representing the loss of the agreement as at December 2002. This would have been subject to any submissions as regards taxation.
238. In his submissions, Mr Gourgey made much of the total price of £250,000 paid by TSS in connection with the acquisition of Limited. If that represented the open market value as at November 2001, it was hard to see why it should be very different in December 2002. Normally, of course, an arms-length deal is the best guide to value. However, in this case, as franchisor Srl had a substantial and continuing financial interest in the performance of Limited after November 2001 for the remainder of the franchise period. For this reason, I do not regard it as a reliable guide to open market value.

Srl's Part 20 claim

239. Srl has pleaded a claim against Limited under CPR Part 20, for damages for breach of the franchise agreement. There are two elements to this claim. First, based on the breaches alleged to have occurred in the period to September 2002, it was asserted that they caused lower sales under the agreement from Srl to Limited and therefore Srl suffered a loss of profits. In his supplementary report Mr Cottle quantified this loss at €43,109. In his closing submissions, Mr Gourgey stated that Srl relies only on the non-production of the catalogue in 2002. I have held that, although Limited was in breach of its obligation to up-date the database, Srl itself failed to take steps necessary to complete and produce the new catalogue. This head of claim therefore fails.
240. The second element in Srl's claim is damages for breach of the agreement in pursuing the nuisance calls campaign in September–December 2002. Part of this was a claim for loss of profits on sales which would otherwise have been made to the UK. However, I have held that throughout that period the failure of Limited to carry on the franchise business was due to Srl's own breach of the agreement and, as the agreement granted an exclusive franchise to Limited, Srl was not entitled to trade with EPD as a franchisee. The loss of profit was not therefore caused by the nuisance calls campaign. In any event, I have held that the nuisance calls campaign did not, on the facts as they existed in the relevant period, constitute a breach of the agreement. That is also an answer to the claim for €10,546 for the cost of new telephone equipment to counter the campaign and €7,310 for additional employment costs. The claim for €7,310 would in any case fail because it relates to the cost of employing Cristiana Sassetti whose evidence shows that she would in any event been employed.
241. Accordingly, I dismiss the Part 20 claim made by Srl.

Conclusion

242. My overall conclusion is that Srl acted in breach of the franchise agreement in giving notice of immediate termination in both September and December 2002. Limited affirmed the agreement after the first notice but lawfully terminated it on 11 December 2002, and is entitled to claim damages for any loss between September and December 2002 and for the loss of future profits. However, Limited was itself already in breach of the agreement in a number of respects which would have entitled Srl to give six months' notice of termination. I am satisfied that Srl would have exercised its right of termination and that Limited is entitled to damages for loss of profits only for the period to 11 June 2003.