LUSH LTD AND ANOTHER v. RED CHANNEL INTERNATIONAL LTD AND OTHERS

HCA 2242/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2242 OF 2012

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D E C I S I O N

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1.  There are four applications before the court:

(i) the plaintiffs’ summons to amend the Statement of Claim;

(ii) the plaintiffs’ application for summary judgment;

(iii) the plaintiffs’ application against the 2^nd, 4^th to 10^th defendants for security for costs in respect of their Counterclaim; and

(iv) the appeal by the 1^st to 8^th defendants against Master K Lo’s refusal to order the plaintiffs to give security for costs in respect of the plaintiffs’ claim.

The Agreement

2.  The 1^st plaintiff is a cosmetics company engaged in the business of producing and retailing handmade cosmetic products.  It has factories in over 51 countries.

3.  The 1^st plaintiff was the original owner of the “LUSH” trademarks in Class 3 and Class 5 in respect of perfumes, toilet preparations, lotions, skin care products, deodorants, shampoos, and soaps etc.  In 2005, the two trademarks were assigned to the 2^nd plaintiff, while the 1^st plaintiff remains as the exclusive licensee of all “LUSH” trademarks throughout the world.

4.  On about 12 August 2002, a tri‑parte Licence Agreement (“the Agreement”) was made between Lush Limited (the 1^st plaintiff herein) as Licensor, Red Channel International Ltd (“Red Channel”) as Licensee, and Tiffany Lau (the 3^rd defendant herein).

5.  By the Agreement, the 1^st plaintiff agreed to grant certain rights to Red Channel to distribute in Hong Kong and Macau a specified range of products bearing the “Lush” name and logo, and to operate retail shops under the “Lush” business format and shop design. 

6.  The initial term of the Agreement was 10 years, but the Agreement provided in clause 5.2 that Red Channel had the right to extend the agreement for one further term of five years by serving a written notice at least one year before termination, subject to agreement being reached with the 1^st plaintiff concerning performance standards and the licence fee to be paid for the renewal.

7.  By clause 7.1, Red Channel agreed that the retail shops to be opened would sell only the specified range of “Lush” products and other ancillary products approved by the 1^st plaintiff. 

8.  Red Channel gave an undertaking, in clause 7.2, that during the operative period of the Agreement it would not be engaged in a business involving the sale of competing products in Hong Kong and Macau.  A similar undertaking was given personally by the 3^rd defendant in clause 21.

9.  Clause 11.4 provided that upon termination of the Agreement “all rights of the Licensee to use the ‘Lush’ name, business format and all other Industrial Property Rights will cease and the Licensee will change its name to a name not incorporating the word ‘Lush’ and cease to use any shop names or Product names agreed for use in the Territory.”

The defendants

10.  It should be noted at this point that there is an issue concerning the identity of the licensee under the Agreement.  It is the defendants’ argument that the licensee was not the 1^st defendant, but a BVI company of the same name (which is not a party to this action).  The defendants point to the fact that the 1^st defendant was incorporated in July 2005 and therefore did not exist at the time of the Agreement.  I will return to this issue in more detail later.  (For the present purpose, I will simply refer to the licensee as “Red Channel”, and insofar as it may be required to distinguish between the Hong Kong and the BVI entities, I will refer to them as “Red Channel HK” and “Red Channel BVI” respectively.)

11.  The 2^nd defendant was used as the vehicle to place purchase orders for the products from the 1^st plaintiff.  The 4^th to 10^th defendants were companies holding the leases of the different “Lush” retail outlets.

12.  The 3^rd defendant and her husband, David Lee (known also by the parties as Dave Lee) have all along been the directors and shareholders of the 1^st, 2^nd, 4^th to 10^th defendants.  Although David Lee is not a party to the Agreement, he clearly has been closely involved in dealing with the plaintiffs and in the affairs of the corporate defendants.  For the present purpose, it is not necessary to distinguish the role between him and the 3^rd defendant.  I will hereafter refer to David Lee as “Lee”, and to him and the 3^rd defendant as “the Lees”.

Background

13.  From about April 2011, and possibly even earlier, there were discussions between the Lees and the 1^st plaintiff about the prospect of renewing the Agreement.  The 1^st plaintiff, however, was alerted in June 2012 that the Lees were involved in a competing business dealing in products under the brand name of “Nest Beauty”.

14.  On 6 July 2012, Lee and Karl Bygrave (of the 1^st plaintiff) met at the Lush Fest (a Lush event held annually in the UK).  Bygrave raised the subject about the Lees’ involvement with “Nest Beauty”.  Their conversation is of importance, for it is the defendants’ pleaded case that on that occasion an agreement was reached orally between the parties concerning the continuation of the operation of the Lush shops and the sale of Lush products (referred to as “the Post‑Expiry Agreement”).  It suffices at this point to note that the existence of the alleged Post‑Expiry Agreement is strongly disputed by the plaintiffs.

15.  On 11 July 2012, the 1^st plaintiff issued a notice of termination to Red Channel (“the Termination Notice”), alleging breaches of clauses 7.2 and 21 of the Agreement.  The Termination Notice indicated that the Agreement would be determined automatically within 30 days unless the defendants were able to prove that the breaches were remedied.  It would be noted that the 30‑day deadline in fact coincided with the expiry of the licence under the Agreement.  In the cover letter sent together with the Termination Notice, it was stated that the parties could explore the possibility of a buy-out to safeguard the employees’ jobs and the continuation of the business. 

16.  The 1^st plaintiff and the Lees did embark on negotiations over the sale of some of the Lush shops in Hong Kong and Macau. In an email from Kenneth Yeung (on behalf of the Lees), a sum of £8 million was proposed.  In a letter of 26 July, the plaintiffs counter‑offered £1 million as the price.  It was reiterated in the letter that the licence would expire in August.

17.  The offer price was not viewed favourably by the Lees.  In an email from the 3^rd defendant of 6 August, she set out different options as to how the defendants might proceed.  The email ended with a request to the plaintiffs to extend the supply of the products to the end of January 2013 to enable the defendants to meet the orders for the Christmas season. 

18.  Andrew Gerrie (of the plaintiffs) replied on 8 August and said that the plaintiffs were keen to continue negotiations, hoping to reach an outcome acceptable to both parties.

19.  In the meantime, the Agreement came to an end on 11 August 2012.  For the present purpose, it matters not whether it has expired by effluxion of time or was terminated for failing to remedy the alleged breaches.  Despite the lapse of the Agreement, the parties have yet to reach any fresh agreement for a new licence or a buy‑out.  It also appears that the parties have not resolved the question relating to the alleged breaches of the Agreement.

20.  In Bygrave’s email of 20 September, one of the options he mentioned was for the defendants’ business to be taken over for £1.5 million. He further urged the parties to come to agreement over the orders already placed, which had been put on hold by the plaintiffs.  This was followed by another email of 21 September from Bygrave headed “Without Prejudice – Holding Period”.  This email has been heavily relied upon by the defendants as evidence of the Post‑Expiry Agreement.

21.  The ensuing correspondence in early October indicated that the parties were negotiating a new licence.  As part of the buy‑out negotiations, the transfer of some of the leases of the defendants’ shops was discussed. Also, there was discussion relating to the arrangement for shipment of the products to Hong Kong.

22.  In Kenneth Yeung’s email of 23 October, he urged the plaintiffs to resume supply of the products immediately.  Bygrave’s reply on 24 October was that supply would be resumed when the parties had signed a Heads of Agreement. 

23.  A draft of the Heads of Agreement was sent to the Lees on 1 November. Anticipating the signing of the Heads of Agreement, the 1^st plaintiff accepted £110,000 worth of orders from the 2^nd defendant and allowed the sea‑shipment to proceed. 

24.  As is evident from the correspondence, many more rounds of the draft agreement were exchanged but the parties were still unable to reach agreement on all the terms.  Air‑shipment was suspended, and the defendants demanded for the outstanding delivery.  

25.  Eventually on 22 November, upon being told that the Lees would be unwilling to sign the Heads of Agreement, the plaintiffs broke off negotiations and demanded discontinuance of the use the “Lush” name, their business format and intellectual property rights belonging to “Lush”.

26.  On 29 November, the plaintiffs demanded confirmation from the defendants that they would not take delivery of the goods in transit upon their arrival.  The next day, the plaintiffs applied for an interlocutory injunction to restrain the 1^st to 3^rd defendants from taking delivery or dealing with the products and from using the “Lush” trademarks etc.  Madam Justice M Chan granted the injunction sought (see the learned judge’s Decision dated 21 December 2012).

27.  I will now deal with the various applications.

Amendment of the Statement of Claim

28.  Paragraph 12 of the Statement of Claim pleads that the 1^st and 3^rd defendants were in breach of the Agreement by reason of (a) their operation of the competing business under the name of “Nest Beauty”; and (b) the division of the Causeway Bay premises into two shops, selling products under the “Lush” brand in one and products of “Nest Beauty” in the other.

29.  The plaintiffs seek to amend the claim for damages by adding a specific head (at para 15(d)) arising from the breach aforesaid.  This is in addition to the existing claim (at para 15(a) to (c)) based primarily on termination of the Agreement either by failure to remedy the breach within the 30‑day time limit or by effluxion of time. 

30.  The proposed amendment does not seek to introduce any new factual allegations. 

31.  Ms Ismail SC (for the defendants) objects to the proposed amendment on the ground that the plaintiffs have not pleaded any loss.  She argues that in the absence of any pleaded loss, the plaintiffs should at best be entitled to nominal damages and there is no room for assessment of such damages, citing Sinoearn International Ltd v Hyundai-CCECC Joint Venture [2012] 1 HKLRD 823, in particular §§69‑70.  

32.  Sinoearn was concerned with the situation where at completion of the trial, the claimant had failed to adduce sufficient evidence to prove substantial damages.  In the absence of a direction for a separate trial of liability and quantum, the learned judge observed that only nominal damages would be awarded as the lack of evidence could not be remedied by an application for assessment of damages.  I do not think the case of Sinoearn assists the defendants.  Here we are not concerned with sufficiency or otherwise of the evidence at the end of the trial.  We are concerned, rather, with whether the plaintiffs should be allowed to make a claim for damages, other than on nominal basis, against the relevant parties arising from their wrongful competition in breach of the Agreement.

33.  The factual basis for claiming damages, in my view, is already sufficiently set out in para 12 of the Statement of Claim.  There should be no difficulty for the relevant defendants to appreciate that the claim against them arises from their involvement in the business of “Nest Beauty” and that the court is being asked to assess and quantify the plaintiffs’ loss resulting from the competing business.  Whether the plaintiffs will eventually succeed in proving the quantum of loss is not a question I need to deal with in connection with the amendment application. 

34.  I should note here that Mr Shipp (for the plaintiffs) has indicated at the hearing that in relation to para 12, despite the reference to clause 7.1 of the Agreement, the plaintiffs’ case is now confined only to a claim for breach of clauses 7.2 and 21 although the plaintiffs still maintains the factual allegations against the defendants.  The plaintiffs’ withdrawal of reliance on clause 7.1 has no bearing on my determination of the amendment application. 

35.  I would, accordingly, allow the amendments to the Statement of Claim. I will consider the plaintiffs’ Order 14 application on the basis of the plaintiffs’ amended case.  

Summary judgment

36.  By their Order 14 application, the plaintiffs seek judgment on the following:

(i) As against the 1^st and 3^rd defendants, for damages arising from breach of clauses 7.2 and 21 of the Agreement, and a direction for such damages to be assessed;

(ii) Damages arising from shipment of the goods in response to the defendants’ request for delivery to meet the Christmas season;

(iii) As against the 1^st to 8^th defendants, for injunctive and other reliefs to restrain them from infringing the trademarks and committing acts of passing off. 

37.  In defence, the defendants raise the following matters:

(i) Whether the 1^st defendant should be liable under the Agreement as it was not incorporated until 2005;

(ii) There was no breach of clause 7.2 or 21 of the Agreement;

(iii) The parties have entered into the Post‑Expiry Agreement which contains an implied term that the plaintiffs should give reasonable notice to the 2^nd to 10^th defendants of at least six months to enable the latter to wind down the business in the event that negotiations broke down between the parties.

38.  I will deal with the disputed issues in turn.

Identity of the licensee

39.  The evidence shows that Red Channel HK (the 1^st defendant) was incorporated on 25 July 2005 and hence not in existence at the time of the Agreement.  Despite the apparent non‑existence of Red Channel HK at the time, curiously, the Agreement described the licensee as “a company registered in Hong Kong and having its principal offices at Flat 5, 10F/L Block B Hankow Center 4A Ashley Rd TST Kowloon Hong Kong SAR”.  There was no indication that the licensee was to be Red Channel BVI. 

40.  In his 3^rd Affidavit, Lee sought to explain that the licence was intended to be held by Red Channel BVI which at the time was intended to be registered as an overseas company in Hong Kong, and thus the description in the Agreement as “a company registered in Hong Kong”.  The address on the Agreement was the registered address of a company owned by the parents of the 3^rd defendant.  When they noticed in July 2005 the description of the licensee in the Agreement, they took steps to incorporate “a Red Channel in Hong Kong”, “thinking that would be alright”. 

41.  In my view, the explanation is neither satisfactory nor believable. 

42.  On the one hand, it is unclear as to what exactly is meant by his saying that the step of incorporating the 1^st defendant in 2005 “would be alright”.  One reading of that statement may in fact suggest that, upon discovery of the non‑existence of an entity that matched the licensee’s description under the Agreement, the Lees chose to rectify the situation by incorporating the 1^st defendant, and, in effect, therefore intended the 1^st defendant to be adopted as the contracting party and the licensee. 

43.  But irrespective of whether that was a correct reading of Lee’s statement, the more important point for the present purpose is that his assertion that the contracting party was Red Channel BVI is not borne out by the contemporaneous documents.  Insofar as he seeks to rely on the parties’ exchanges in about March to May 2012 concerning the entity to be used in the draft Renewal Development Agreement, I consider such exchanges to be of very little probative value as to what his true intention was back in 2002. 

44.  Rather more importantly, in the letter of 19 July 2012, when the then solicitors for the 1^st defendant responded to the Termination Notice, they said:

“Point 3 concerns the fact that Red Channel International Limited was not incorporated in 2002 at the time when the agreement was signed; instead, it was incorporated in 2005. Our client has a reasonable explanation and our client has made good the mistake. ……

Referring to point 3, the late incorporation of Red Channel is conceded by our client as a mistake. Our client rectified this once the mistake was discovered. ….” (emphasis added)

45.  It is readily apparent from the above letter that the Lees considered the non-incorporation of the 1^st defendant at the time of the Agreement a mistake and that the mistake was rectified when discovered.   The only fair reading of the letter is that it was indeed the Lees’ intention to use the 1^st defendant as the contracting party at the time of the Agreement – and hence the reference to its late incorporation, which was described as a mistake.

46.  In short, David Lee’s assertion that Red Channel BVI was the intended contracting party and licensee at the time of the Agreement is simply not believable. 

47.  That said, however, it remains an undisputed fact that the 1^st defendant was not then in existence in 2002.

48.  Mr Shipp relies on section 32A of the pre‑2014 version of the Companies Ordinance.  There is no dispute that that provision is applicable to the events in this Action.  Section 32A provides as follows:

“(1) Where a contract purports to have been made in the name or on behalf of a company at a time when the company has not been incorporated –

…

(b) the company may, after incorporation, ratify the contract to the same extent as if it had already been incorporated at that time and as if the contract had been entered into on its behalf by an agent acting without its authority.”

49.  It is Mr Shipp’s contention that the conduct of the parties and the correspondence have shown that the 1^st defendant has ratified the Agreement.  I agree with Mr Shipp.  Indeed, I believe this is exactly what the 1^st defendant meant in their solicitors’ letter when the latter referred to the mistake of non‑incorporation having been rectified in 2005.  Evidently, it was the Lees’ intention thenceforth to treat the 1^st defendant as the party to the Agreement and the holder of the licence — in other words, ratification by the 1^st defendant of the Agreement.

50.  Ms Ismail refers to the case, Shogun Finance Ltd v Hudson [2004] 1 AC 919.  Shogun was a case concerning a hire‑purchase contract procured and signed by a fraudster with the use of a stolen driving licence as proof of identity.  It was held that the hirer under the contract was the person named on the contract as a matter of construction of the document itself (see para 47).  Emphasis was placed on the fact that the contract was a consumer‑credit contract where the creditworthiness and hence identity of the hirer was crucial.  The facts of Shogun are obviously very different from our present case.  If anything, if one were to construe the Agreement by reference to the description of the licensee, it would actually favour the conclusion that the contracting party was to be the 1^st defendant. 

51.  Ms Ismail refers to the passage in Lord Phillips’ speech at para 156 where Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45 was cited.  The discussion in Newborne regarding the identity of the contracting party should be considered in light of the facts of that particular case.  While I have taken note of the observations referred to at paras 156 and 157, I derive only limited assistance from them in considering whether the 1^st defendant was intended to be the contracting party in the present case.  Besides, as pointed out by Mr Shipp, Newborne was decided in 1954, before the introduction of section 9 of the European Communities Act 1972 which gave effect to pre‑incorporation contracts.  Newborne offers little assistance for our present purpose.

52.  Ms Ismail further takes a pleading point that there is no plea of ratification in the Statement of Claim (or its amended version).  In answer, Mr Shipp contends that the averment in para 9 that the 1^st defendant was the contracting party (with the 3^rd defendant purportedly acting on its behalf) is sufficiently broad to enable the plaintiffs to invoke section 32A.   Mr Shipp also refers to para 4 of the Amended Reply, which denies that Red Channel BVI was ever the contracting party, and pleads positively that the existence of Red Channel BVI was not known to the plaintiffs until June 2012. 

53.  In my view, although the absence of an express plea of ratification justifiably attracts criticisms, I would accept that the reliance on section 32A is but the means to achieving the plaintiffs’ pleaded legal result.  I think on balance, the case pleaded by the plaintiffs is broad enough to accommodate reliance on section 32A.  I do not believe any useful purpose will be served by allowing the ultimate question to be deflected, namely, whether there is a triable issue as to the identity of the contracting party.  The pleading point is not one of substance and should not prevent me from arriving at the conclusion that the 1^st defendant was the contracting party and bound by the Agreement.

Breach of clauses 7.2 and 21

54.  I have already referred to clause 7.2 of the Agreement, which provides that:

“The Licensee [the 1^st defendant ] undertakes to the Licensor that it will not during the Term be directly or indirectly engaged concerned, or interested in any business involving the manufacture, sale or supply of any goods in the Territory [ie Hong Kong and Macau] which compete with the Products in the Territory.”

55.  An undertaking of similar effect was given by the 3^rd defendant in clause 21.

56.  The Products of the plaintiffs, defined as comprising those set out in Part 1 of Schedule 2 of the Agreement, include a wide range of skincare and beauty products, such as shower gel, body cream, shampoo, conditioner, bath oils, soap, fragrance, deodorants etc.

57.  The plaintiffs’ case is that the 1^st and 3^rd defendants had (through the vehicle of Sino Enterprise Investment Limited) set up shops and sold under the “Nest Beauty” brand, cosmetic products including bath, skin care, colour cosmetics and hair care products, which are products competing with those of the plaintiffs. 

58.  It is not disputed that Sino Enterprise carried on business under the name of “Nest Beauty” and that the Lees were the directors of Sino Enterprise and indirectly held the shares of the company.  It is also not disputed that Sino Enterprise had set up shops and sold ethical cosmetic products.  The thrust of the defendants’ case is that the products of the “Lush” and “Nest Beauty” brand do not compete, but are “complementary” to each other in that Lush’s products serve the mass market with a lower price and age group whereas Nest Beauty’s serve the upper end with premium products.  Further, it was emphasised that Nest Beauty’s products, in contrast with Lush’s, do not contain parabens or other harmful ingredients which Lush apparently knew to be controversial. 

59.  The evidence shows, however, similarities in the type of skin- / body‑care and cosmetic products being offered by Nest Beauty and Lush.   Moreover Nest Beauty, according to its mission statement, was promoting itself as a brand of ethical cosmetic products, with claims of being natural, organic, free from harmful chemicals or animal‑testing, with also claims of adopting ethical sourcing and practices of fair trade.  Such claims were obviously very similar to Lush’s branding policy with emphasis on ethical and environmentally sustainable practices, prohibition against sourcing from companies involving animal‑testing, and integration of the “green” culture in its operation. 

60.  Moreover, in 2011 and 2012, Nest Beauty’s advertisements on its Facebook page included a variety of skincare products such as soap, facial cream, shampoo, cleansing lotion, sunscreen.  There was a magazine article posted on 5 July 2011 which shows a Nest Beauty’s “Mukti tinted moisturizer with sunscreen” being placed together with the Lush product “Skin Nanny Moisturizer with SPF 30”.  Evidently, the products of the two brands, among others, were put alongside each other for comparison.

61.  There is also another page that shows Nest Beauty’s “Kiss Without Fear” campaign in April 2012, which was similar to the plaintiffs’ “Kiss and Tell Campaign” in 2011.

62.  Further evidence also reveals that the defendants had arranged a “Lush and Nest Beauty Private Sale” from 25 to 27 July 2012, at the address of the registered office of the 1^st, 2^nd, 4^th to 8^th defendants.  The “Lush” and “Nest Beauty” brands were placed prominently side‑by‑side at the top of the promotion leaflet.

63.  Also of note is the evidence that the Lees had operated a Nest Beauty outlet at Windsor House immediately next to the shop premises of Lush. Significantly, both were specialty shops and the products were sold in immediate proximity to potential customers. 

64.  In view of the above, even taking note of the defendants’ evidence that some of the products offered by Nest Beauty were not available at the Lush shops and also evidence that the ingredients used were different between similar products, I do not think that such differentiation had rendered the Nest Beauty brand of skin- / body‑care and cosmetic products any less a competitor of those under the Lush brand.  In light of the evidence in this present case, it is clear to me that the 1^st and 3^rd defendants were in breach of clause 7.2 and 21 of the Agreement by having engaged in a business involving the sale and supply of products which competed with the plaintiffs’.

65.  Mr Shipp asks me also to take note of the evidence of the 3^rd defendant who has claimed that 92% of Nest Beauty’s retail sales were not available at the Lush shops.  This assertion, says Mr Shipp, amounts to an implied admission that at least some (if only a small proportion) of the Nest Beauty’s products were in fact competing products.  I am however not inclined so to read the 3^rd defendant’s evidence.  In any event, I have not found it necessary to rely on any supposed admission of the defendants.  In my view the evidence already identified is sufficient to enable me to arrive at the conclusion on liability that the 1^st and 3^rd defendants have been in breach of the relevant terms of the Agreement. 

66.  Before I leave the issue on the non-competition clauses, I need to deal with two further points made by Ms Ismail.  First, she refers me to Microfloor Systems Limited v Wey Flooring (Guildford) Limited (English Court of Appeal, unreported, 18 March 1992).  Ms Ismail contends that the issues of liability and quantum must be kept separate, and if the court finds that there has been a breach it must determine the extent of the breach and cannot leave it to be clarified at the stage of the assessment of damages. 

67.  Microfloor Systems was an application to set aside a default judgment.  In that case, one of the claims concerned the defendant’s alleged breach by selling directly-competing products, and specific allegations were made involving five specified sites where the products were used.  Evidence was adduced specifically in relation to the five sites but it seems there might have been other unpleaded breaches elsewhere.  Neill LJ, having examined the evidence and the facts, said:

“1. It is necessary to distinguish clearly between the issue of liability and the issue of damages. In my view, even if some breaches were proved in the sense that no arguable defence had been put forward, it would not be right to give a general judgment based on these breaches and then leave the issue of whether there may have been other breaches to be determined in the course of a wide-ranging assessment of damages. …

2. In a case such as the present, where a business relationship extending over two years is being considered, it is first necessary to examine the major breaches alleged – in this case the alleged repudiation and the pleaded breaches of 4(a). If there have been major breaches to which there is no arguable defence, it may be right to give judgment for damages to be assessed in respect of these breaches and then consider whether judgment should also be given for other minor breaches for which no adequate defence has been put forward. If, however, there are real issues on the major matters which will have to be looked at in detail by the judge at a trial, the court should hesitate before giving judgment on minor breaches unless they can be viewed in isolation from the rest of the case. A piecemeal judgment where certain issues are removed from the judge may make it difficult to reach a satisfactory solution on the main issues.” (emphasis added)

68.  The focus of the passage turns on the approach when, as in that case, there is evidence specifically of the major breaches but uncertain as to other unspecified ones. I do not consider the learned judge to be saying that the exact extent of the breach must be ascertained before a finding of liability can be made.  In our case, the essence of clause 7.2 is a prohibition against the 1^st and 3^rd defendants’ involvement in a business selling or supply competing products.  Having concluded on the evidence that Nest Beauty had indeed promoted and sold skin- / body‑care and cosmetic products in competition with Lush, I do not think it is necessary at this stage to examine each of the items offered by Nest Beauty to see which particular ones could be considered as competing.  Nor do I think the fact that some of Nest Beauty’s products did not exactly overlap with Lush’s are “real issues on the major matters” that should detract from my conclusion.  Those are matters going to the extent of the plaintiffs’ loss to be ascertained at the assessment stage of the proceedings.      

69.  I also accept Mr Shipp’s argument that a breach of a non-competition clause, such as clauses 7.2 and 21 in the present case, is in nature a continuing breach during the operative period of the contract: Chitty on Contracts, 31^st edn, vol 1, para 26‑013.  In my view the precise extent of the wrongful competition and the quantification of the resulting loss to the plaintiffs are proper matters for determination in the assessment of damages. 

70.  Ms Ismail’s other point relates to the question of causation.  It is the defendants’ contention that there is no causal link between the breach of clauses 7.2 and 21 and loss allegedly suffered by the plaintiffs – by way of loss of licence fees and profits which would have been gained under a new licence, and for expenses for setting up and promoting their own Lush shops and products.  Again it seems to me the question of causation is best reserved to the next stage of the proceedings for the assessment.

The Post‑Expiry Agreement

71.  Turning now to two other claims of the plaintiffs: “the Goods Claim” and “the IP Claims”.

72.  For the Goods Claim, it is the plaintiffs’ case that while the parties were in negotiation after termination of the Agreement, the 1^st plaintiff had made shipment of goods at the request of the 3^rd defendant to meet the latter’s needs.  Eventually despite the breakdown in negotiation, the 1^st and/or 3^rd defendants insisted on taking delivery of the goods.  This prompted the 1^st plaintiff to apply for the ex parte injunction.  The 1^st plaintiff claims damages in relation to the goods supplied under the shipment, for freight and warehouse charges for storing the goods, as well as legal costs of the injunction application (see para 24 of the Amended Statement of Claim). 

73.  For the IP Claims, it is the plaintiffs’ case that after termination of the Agreement, the defendants has infringed the plaintiffs’ registered trademarks, and passed off their business as connected or associated with the plaintiffs.  At the hearing, Mr Shipp has confirmed that the IP Claims should be confined to the period after breakdown of negotiations between the parties (that is, 22 November 2012), accepting that the parties’ relationship in the interim (before 22 November) could be characterised as a “licence at will”. 

74.  In defence, the defendants rely primarily on the Post‑Expiry Agreement.  The defendants’ case is that the Post‑Expiry Agreement was first entered into orally in July 2012 at the Lush Fest, and such agreement was subsequently evidenced and/or also contained in the communications between the parties.  It was an express term of the Post‑Expiry Agreement that during negotiations for the buy‑out, the defendants would continue the Lush shops and sell the products under the name of Lush and use the relevant trademarks.  There was also an implied term that should the negotiations break down, the plaintiffs would give reasonable notice to the 2^nd to 10^th defendants to enable them to effect an orderly winding‑down.  The period of reasonable notice is said to be at least six months (that is, up to at least 22 May 2013).

75.  At this point I wish to observe, first, that the defendants have put their case firmly on the basis of an agreement having been reached between the parties.  One, of course, cannot consider the alleged agreement in isolation from its terms.  It is therefore worth noting, secondly, that the pleaded express term provides merely that the interim operation of the shops and the use of the Lush trademark were to continue during negotiations for the buy‑out.  In other words, the express term as pleaded is not of any definite or specified duration but simply for so long as the parties’ negotiations continued.  It is also not the defendants’ case that there was any express agreement on notice period.  The latter is alleged to have arisen by way of implication only. 

76.  Also worth noting is the confirmation of Ms Ismail at the hearing that it is not the defendants’ case to invoke or rely on any principles of estoppel to enable their operations to continue after termination of the Agreement.  The defendants’ case rests solely on the Post‑Expiry Agreement. 

77.  It is the defendants’ contention that by reason of the Post‑Expiry Agreement they were entitled to continue to receive the goods, and hence the Goods Claim fails.  Because of the Post‑Expiry Agreement, they were also entitled to continue operating under the Lush name and to use the relevant trademarks, and therefore the IP Claim also fails.  As already noted, the existence of the Post‑Expiry Agreement and the implied term are strongly disputed by the plaintiffs. 

78.  As would be remembered, the Lush Fest took place on 6 July 2012.  The conversation between Lee and Bygrave took place against the background that parties had for over a year been discussing the prospect of extending their collaboration for a further five year period.  Since about December 2011, there had been exchanges of the draft Renewal Development Agreement (“draft RDA”) and draft shop license agreements.  Indeed, in Lee’s email to Bygrave on 18 June 2012 (attaching his comments on the draft RDA), Lee was thankful to everyone for their work and believed they were very close to coming to an agreement.  In the reply email from the plaintiffs’ external consultant on the following day, it appears that only two issues were outstanding, namely, information about the shareholders and capital of the prospective licensee, and details of the warehouse and the shops.

79.  It so happens that at about the end of June 2012, the plaintiffs discovered the Lees’ involvement with Nest Beauty.

80.  Such was the background of the meeting between Lee and Bygrave at the Lush Fest.  According to David Lee’s account, on that occasion Bygrave questioned him about involvement with Nest Beauty and said that the plaintiffs would not be renewing the Agreement unless he (Lee) could prove that he was not involved in its business.  Bygrave, however, indicated that what he wanted was not for the defendants to close all the Lush shops but for the parties to work out something for the future.  There was some discussion about supply for the coming Christmas season.  Bygrave confirmed that the defendants would be selling Lush for Christmas that year as he (Bygrave) expected discussions would take some six months or more.  It was thus “the understanding” of the defendants that they would be operating the Hong Kong Lush shops for at least six months after that conversation.

81.  Bygrave’s version of the conversation is that he had indeed told Lee that there was no way that the Agreement could be renewed when the 1^st defendant was in breach of the license.  Lee did not admit involvement with Nest Beauty. He told Lee that the parties should try to work out a deal whereby the defendants could transfer the shops to the plaintiffs and achieved a smooth transfer.  Lee asked Bygrave for permission to trade until Christmas.  Bygrave’s immediate response was that there was no reason why a deal could not be struck by September 2012, but there was no mention of expecting the discussions to take some six months. 

82.  Thus, it appears that whilst both have said the parties would discuss further, they differ as to whether the discussion was to be about the prospect of future collaboration, or whether confined only to the defendants’ transfer of their operations to the plaintiffs.

83.  In the ensuing emails on 10 and 11 July 2012, the focus of the parties’ discussion was on the valuation of the defendants’ business, evidently with a view to exploring the possibility of a buy‑out of the business by the plaintiffs. 

84.  As already noted, the Termination Notice was issued on 11 July. On 19 July, in the email from Kenneth Yeung (on behalf of the Lees), Yeung said:

“(1) It appears that Lush UK is reluctant to renew the franchise agreement with Mr Dave Lee also giving up hope on reaching any agreement on this matter.

(2) There are only two alternatives left for Lush UK and Mr Dave Lee. The alternatives are (i) for Lush UK to buy out the existing operations from Mr Dave Lee; or (ii) Mr Dave Lee is to close the existing operations and to engage the same for non-Lush business / products.

…

(4) As far as Mr Dave Lee is concerned, he wishes to close down the Hong Kong Lush operations as soon as the franchise agreement expires in August. This would enable him to pursue other more profitable operations engaging the same staff and premises. …..

(5) However, Mr Dave Lee is reluctant to see the ‘Lush’ brand disappear from the Hong Kong market ... Mr Dave Lee is therefore happy to transfer the existing operations to Lush UK as long as a reasonable amount of compensation is given to him.

…..” (emphasis added)

Yeung then made an offer of £8 million as a starting point for negotiating the buy‑out.

85.  In the plaintiffs’ letter of 26 July, a price of £1 million was counter‑offered.  The plaintiffs’ letter ended with the following:

“In the event that you do not accept our proposal and as the current license is due to expire in August, please would you submit a plan demonstrating how the Lush shops are to be closed in a timely manner, debts setled (sic) and all Lush material returned to us in accordance with the Lush License. We will obviously purchase all stock that is saleable and within the display shelf life guidelines including shipments in transit as you will nolonger (sic) have a license to sell Lush stock.

We would suggest that we arrange for members of our staff to be on hand, to supervise the closure and deal with any matters at the time.” (emphasis added)

86.  The defendants replied through their solicitors on 31 July. The defendants did not consider that they had the obligation under the Agreement to produce a closure plan.  The last paragraph of the letter stated:

“… In order to continue the discussions on the buy-out figure, the discussion on the provision of the close out plan, the continuation of the Lush brand in Hong Kong and Macau plus the minimisation of loss for both parties, we respectfully invite you to consider our proposal for a grace period of up to 31 December 2012. …” (emphasis added)

87.  In a further email from Yeung on 1 August, he listed six factors that would adversely affect the brand image of Lush if the Lees were to stop operations on 12 August 2012.  Towards the end of the email, Yeung stated:

“… Nonetheless, by virtue that the expiry of the agreement between Lush UK and Mr Dave Lee is imminent, Mr Dave Lee will NOT wish to continue selling Lush products in his stores in Hong Kong after 12 August 2012. He will NOT risk any legal liabilities by selling Lush products without proper licenses. Therefore, if you wish to continue our conversation and do not wish to see the brand disappear in the course of the negotiation, please advise Mr Dave Lee formally before the close of Friday (2 August) that you wish to extend the agreement unconditionally to a date which will be agreed by both parties.” (original emphasis)

Yeung continued:

“In the absence of such commitment from yourself, Mr Dave Lee will have no other option but to start his ‘closing down’ sales on Monday – 5 August 2012. The ‘closing down’ decision will be irreversible and this will definitely put a dent to your global expansion plan. .” (emphasis added)

88.  By an email from the 3^rd defendant to the plaintiffs on 6 August, she declined the £1 million purchase price and suggested “a fair amount to be paid for [the defendants’] business, and [the defendants] can hand over the operation to Lush in a professional manner …”.  In the last paragraph of the email, the 3^rd defendant said:

“Finally, as we need to decide urgently whether we will proceed with the Green campaign, Xmas PR event, Xmas ordering, etc. There are also multiple orders in progress. Pls extend our operations immediately till Jan 31, 2013 (end of Chinese New Year so that we can have a good farewell party to our dedicated staff). …” (emphasis added)

89.  Bygrave’s reply email to Yeung on 10 August ended with the statement that:

“As the license expires on Sunday it would be good to agree the plan.”

90.  I have set out the parties’ correspondence in some detail beginning from the Lush Fest up to the termination of the Agreement (on 11 August or 12 August, the exact date is immaterial for the present purpose).  I do so in view of the defendants’ pleaded case that an agreement has been reached expressly concerning the operation of the Lush shops during the ongoing negotiations.

91.  I wish to note, first, that when I consider the above correspondence, I do not regard the defendants’ repeated mention of a possible closing‑down as necessarily undermining their pleaded case of having an agreement concerning the continued operation of the shops. I am prepared to assume in favour of the defendants that the closing-down scenario might only have been deployed to strengthen their bargaining position and did not necessarily reflect their firm intention to close down at the time.  That notwithstanding, the fact remains that the defendants must be, and evidently were, keenly aware that if no agreement was reached either for a buy-out or for a fresh licence, the existing Agreement would terminate on 12 August 2012.  That being the case, if there has indeed been an express agreement for the defendants’ operation to continue beyond the expiry of the existing Agreement, it would be inconceivable that the Lees and Yeung did not make any reference to such agreement in the correspondence at all.  Even noting the defendants’ mention of an extension of their operations, it was in fact couched in tentative terms in the language of a proposal or of a request.  Therefore, up to the end of the existing Agreement, the correspondence is clearly inconsistent with the defendants’ case that the parties had entered into an agreement at or since the Lush Fest regarding the continued operation of the Lush shops and use of the Lush brand. 

92.  Then after termination of the Agreement, discussions continued between the parties. 

93.  In the plaintiffs’ letter of 24 August, the plaintiffs stated:

“Termination of License Agreement

To clarify, we will not be renewing your clients expired License Agreement, due to the fact …” (emphasis added)

Agreed wind down

On the 3^rd of August, … Kenneth raised concerns about simply closing the stores and it was mutually agreed that the Directors of Red Channel would prepare and submit to Lush, a wind down/ transfer plan for the existing Hong Kong shops and all other relevant matters, to date this has not been received.” 

The letter ended with the following:

“Next action

On the 10^th of September, Mr Karl Bygrave and Mr Andrew Gerrie will travel to Hong Kong to hopefully meet with your client. Whilst discussions are taking place in respect of the wind down of Lush Hong Kong, it is agreed that Lush will allow you to continue to trade under the brand. This permission is subject to review, which will take place by the 14^th September 2012. Our ongoing consent to the use of the brand is entirely without prejudice to our position that the License Agreement has been terminated.” (emphasis added)

94.  It appears that the plaintiffs and the defendants had met on about 10 and 11 September. 

95.  On 14 September, the defendants’ then solicitors wrote:

“We have been instructed by our client to clarify to you our client’s current contractual position with respect to its operation of the ‘Lush’ business in the Hong Kong SAR and Macao (‘Territory’). As you are well aware, … the term of the licence … expired on 11 August 2012. There has, however, been a clear extension of the term of our client’s rights as the licensee of the ‘Lush’ brand beyond that date, as evidenced inter alia by the terms of your letter of 24 August 2012 and the continuing conduct of both parties. In particular, we note that various orders have been placed by our client’s in the ordinary course of business since 24 August 2012 which have been accepted by you.

Following the ad hoc extension of our client’s rights if either you, or our client, now wish to terminate the current arrangements, as a matter of law any notice of termination must be reasonable in the circumstances and in the context of the Lush business in the Territory.” (emphasis added)

96.  At this point, I will add Yeung’s evidence, where he said (affirmation dated 11 December 2012, para 5) that during several conversations he had with Bygrave, the latter made it clear that the plaintiffs would not seek immediate closure of the defendants’ shops.  Bygrave had given an assurance that the defendants’ shops could continue to operate while the parties negotiated the buy‑out terms.  Yeung relied on the plaintiffs’ letter of 24 August as demonstrating Bygrave’s assurance.

97.  In response to Yeung’s evidence, Bygrave said (affidavit dated 12 December 2012, para 5) that although he did agree that he would allow the defendants’ shops to continue trading, it was on the express understanding that such trading would only continue whilst the parties were undergoing negotiation on a good faith basis with a view to reaching an agreement.  In any event, such an arrangement would only continue until 14 September 2012 when he would be reviewing it whilst he was in Hong Kong. 

98.  The 3^rd defendant’s evidence on this point (6^th Affidavit dated 12 May 2014, para 17) is that notwithstanding the plaintiffs’ indication that the arrangement would be reviewed on 14 September, there were verbal discussions between the parties after 14 September where Bygrave agreed that the defendants could continue their operation of the Lush business.  She pointed out in particular that products were received from the plaintiffs on 18 September.

99.  In the email from Bygrave on 20 September headed “Without Prejudice Options”, he mentioned two options: that is, the parties agreeing to a date for ceasing the existing shops, or a plaintiff’s buy‑out at the price offered.  Bygrave ended by referring to the outstanding orders and indicated that the plaintiffs would not be extending the credit terms to the Lees.  In a further email on 21 September, headed “Without Prejudice — Holding Period”, Bygrave said:

“Dear all

Further to my conversation with Kenneth today I am writing to advise the current situation and the way forward hopefully to the satisfaction of all parties.

There are substantial orders of around £300k in with Lush Manufacturing and £109k due for payment next Friday.

We have been advised that a fair wind down period is 6 months so in order for the wind down of the business following the termination of the license we are giving 6 months notice for the Lush business in Hong Kong to close, the final date being 1^st March 2013.

This means that either the business will end or we will agree for the transfer of the business. This gives time for the details to be worked out.

With regards to the supply of products the current orders will be supplied on normal credit terms … It is also a condition that we meet in the UK within 2 weeks to discuss the details.

This will enable Lush to be comfortable about the credit levels and Lush Hong Kong to trade in the short term until the close date.

Please confirm that the above terms are agreed and provide dates for meeting.” (emphasis added)

100.  The defendants responded through their solicitors (in a letter dated 21 September) as follows:

“We note your purported service of a notice of termination of the current arrangements relating to the Lush business in Hong Kong expiring on 1 March 2013 as set out in your email of 21 September 2012. We note this does not constitute 6 months notice of termination of the current arrangements and as such is invalid. If you wish to serve notice of termination, please do so formally ….. and for the full period of required notice. …

In the meantime our client requires you to continue performing your obligations under the ad hoc arrangements in place, and in particular to ensure that all orders placed and accepted are delivered in a timely manner. ...” (emphasis added)

101.  The next letter from the plaintiffs dated 28 September should also be noted:

“The purpose of this letter is to clarify our position on the basis that you have rejected our offer of a six month extension to allow you to wind down the business.

Termination of the License Agreement

To clarify, we will not be renewing your breached and expired License Agreement, due to the fact that …….

We would like to refer you to our letter of the 24^th August 2012, where we agreed that we would allow you to continue to trade under our brand until the 14^th September 2012 with a view to reaching an amicable solution and subject to the consent to use the brand is entirely without prejudice to our position that the Licence Agreement was terminated.

…

Your attendance at a meeting next week will increase the likelihood of reaching a mutually agreed decision on a way forward. If you do not attend and without further explanation, … we will have exhausted all avenues of discussion and hereby notify you that we require you to immediately cease all use of the LUSH mark in accordance with the terms of the Licence Agreement. ….

Order for Goods

In respect of the Order recently placed for stock, we feel it only prudent to notify you that in the absence of an agreement being reached at the meeting next week, ... we are unable to accept the Order.

…” (emphasis added)

102.  I am conscious that it is necessary to read the whole series of correspondence (which I have done) before coming to a view as to whether the disputed Post‑Expiry Agreement is a triable issue.  But before going further, I pause to make a few observations with respect to the correspondence up to this point, which I have highlighted above. 

103.  First, the plaintiffs’ position, firmly stated in the 24 August letter and repeated in the 28 September letter, was that the Agreement had come to an end and would not be renewed. 

104.  Secondly, whilst the parties were in discussion about the way forward, there would be an interim arrangement that the defendants would be allowed to continue operation under the Lush brand. The defendants’ solicitors called it an “ad hoc extension of [their] client’s rights” in the 14 September letter, citing the plaintiffs’ letter of 24 August as evidencing such extension.  But it is clear from the plaintiffs’ 24 August letter that such interim arrangement was to be reviewed by 14 September.  The 24 August letter is clearly not an offer or promise to allow continuation of the operation for some indeterminate or unspecified period of negotiation.  Still less should the 24 August letter be itself regarded as constituting an agreement to such effect.

105.  Thirdly, much reliance was placed by the defendants on Bygrave’s emails of 20 and 21 September.  It must be noted first that both emails were headed “without prejudice”.  In the context, it must be clear that the plaintiffs were maintaining their basic position, namely, that the Agreement had already terminated.  Whatever the ensuing discussions (including the interim arrangement for supply of products), such discussions must be understood not to affect the plaintiffs’ basic position. 

106.  The defendants stressed the reference to the six months’ wind‑down notice in Bygrave’s emails.  But it is to be noted, first, that the six months’ notice was mentioned as an advice given to the plaintiffs.  At best, such a reference was nothing more than the plaintiffs’ own view as to the notice required, rather than an agreement to such effect.  And importantly, it is clearly stated in the emails that any interim arrangement as might be put in place would have to end by 1 March 2013.  The deadline was stipulated as part and parcel of the interim arrangement proposed, meaning of course that the interim arrangement was not intended simply to continue for some unspecified period of negotiation.  The setting of the March 2013 deadline is also inconsistent with any suggestion that the interim arrangement should continue until the expiry of six months after termination of negotiations (as pleaded by way of the implied term).

107.  I will now continue with my review of the further correspondence.

108.  On 1 October, Yeung sent the following email to Bygrave, summarising an earlier meeting between them:

“1) You would today start drafting a memorandum of understanding that the Hong Kong business will terminate selling Lush products by February / March of 2013. You would state how stock within the sell by date would be bought back by Lush UK at costs and how the ‘old’ stock may be treated by both parties.

2) On agreement of the above, you would immediately arrange for the shipments to be forwarded to Hong Kong …

3) You will also talk to your team about the partial purchase of the business …

4) You will come back within this week for an official offer after you get consent from your other team members.”

(emphasis added)

109.  Bygrave replied on 3 October:

“We are drafting a new licence ….. to allow the existing shops to trade until the end of February on a non-exclusive basis.” (emphasis added)

In the same email, Bygrave said that the sale of four shops to the plaintiffs would be a condition of the new licence.    

110.  In an SMS message on 4 October to Bygrave, Yeung suggested that parties should look at “continue to supply goods” and “partial transfer of business” as two independent issues.  He continued:

“As discussed in our previous meeting, Dave and Tiffany would agree to cease selling Lush goods in an orderly manner even if the partial transfer of business does not reach an amicable solution. I do not understand why you have made the latter as a condition to the former. In any event, I am here to help getting both parties getting some sort of agreement.”

111.  There were further negotiations on the transfer of the four shops and the supply of the products.  On 16 October, Bygrave offered to supply goods for sale until Chinese New Year (10 February 2013) on terms.  He ended by saying:

“Please let me know by the close of business tomorrow wether (sic) or not this proposal is acceptable as without an agreement the exiting shops will need to close immediately.” (emphasis added)

112.  On 22 October, Bygrave informed Yeung that plaintiffs would not accept the defendants’ nomination of the four shops to be transferred.  Bygrave said:

“If you are able to accept our proposal regarding shops then we are able accept your request to extend the closure period and we suggest 1st March 2013 to avoid the New Year celebrations.

Please let me know your decision …. as the stores will need to cease trading as Lush shops if we are unable to reach an agreement.” (emphasis added)

113.  On 23 October, Bygrave and the Lees (through Yeung) had apparently agreed on the transfer of four specified shops for £1.5 million and subject to further discussion the transfer date was to fall in the middle of January 2013.  The final termination date for the agreement would be 15 March 2013 when the other seven outlets would be closed or converted to other brands.  

114.  Bygrave responded on 24 October, saying:

“Everything is fine except that I agreed to resume supply when we had a Heads of Agreement signed.”

115.  On the same day, Yeung replied by asking the plaintiffs to resume supply of goods immediately with the understanding that the Heads of Agreement would be signed as soon as the draft was ready.  Negotiations on the Heads of Agreement continued, but as noted earlier, ultimately broke down.  On 22 November, a notice was issued by the plaintiffs stating that they had withdrawn from the negotiations, and demanding that the defendants should cease the use of the Lush name and other intellectual property rights belonging to the plaintiffs. 

116.  On 30 November, the defendants’ then solicitors wrote and asserted the right to be given reasonable notice of termination of the existing arrangement. 

117.  I have reviewed and discussed the material correspondence in detail.  It is quite clear from a review of the correspondence that even though the defendants’ operation was in fact allowed to continue while the negotiation was ongoing, the correspondence did not support the defendants’ case that such interim state of affairs was pursuant to an agreement with the express term as contended by the defendants.  Without the agreement, there is no room for the implication of a term (of requiring the giving of six months’ notice after negotiation).

118.  On the evidence before the court, I am clearly of the view that the defendants have failed to establish any triable issue by way of the alleged Post‑Expiry Agreement. 

The Goods Claim

119.  With regard to the shipment of the goods, as already referred to above, Bygrave offered in his email on 16 October to supply goods for sale until Chinese New Year (10 February 2013) on certain payment and credit terms.  On 23 October, the parties had apparently reached agreement relating to the price for the transfer of the four specified shops and proceeded to draft the transfer agreement.  Yeung wrote:

“In the meantime, you have agreed that Lush will resume supply of goods to Dave and Tiffany with immediate effect under the normal trading terms. …..” (Original emphasis)

120.  Yeung wrote again on 24 October:

“….. Dave & Tiffany would like me to explain to you their difficulties in relation to the goods that they have ordered for the Christmas period. As far as the shops in Hong Kong are concerned, it is essential that goods must be dispatched from the UK warehouse by coming Monday or Tuesday, the latest. …..

In view of the above, pleased consider one of the following proposals:

1) Please resume the supply of goods immediately with an understanding that the heads of agreement will be signed as soon as it is drafted. Of course the heads of agreement will be subject to contract.

2) You draft the heads of agreement before Monday and Dave & Tiffany will sign them (again subject to contract) in order that goods can be dispatched by next Monday / Tuesday.

3) …” (emphasis added)

121.  Bygrave replied on 24 October (as already quoted above) that the plaintiffs would resume supply when the Heads of Agreement was signed.

122.  On 1 November, Lee wrote to Bygrave and stated that in principle they agreed to sell the four shops for £1.5 million, but would need time to review the draft agreement.  Bygrave replied on the same day expressing disappointment that the Heads of Agreement had not been signed. Bygrave said:

“However, we have released the product to the freight carry in anticipation of you signing the Heads of Agreement or at least confirming the main points of the agreement by email.

If you don’t agree or are not really committed to the deal then you need stop using our intellectual property …” (emphasis added)

123.  Having reviewed the correspondence, it is clear that the shipment of the goods was requested by the 1^st and 3^rd defendants. The plaintiffs made it clear that shipment was conditional upon the parties’ concluding and signing the Heads of Agreement.  The property in the goods was never intended to pass unconditionally to the 1^st and 3^rd defendants. As the Heads of Agreement were eventually never signed, there is no basis for the defendants to claim any right over the goods.  The defendants have failed to set up any triable issue in answer to the plaintiffs’ claim for damages (for the freight and storage, and in relation to the goods).  The plaintiffs’ costs of the application for the ex parte injunction should, however, form part of the costs of the proceedings, and not an item of damages.  

The IP Claims

124.  The only defence relied upon by the defendants in answer to the IP Claims is the Post‑Expiry Agreement and the implied term for reasonable notice.  The Post‑Expiry Agreement having been rejected, the defendants have no defence to the IP Claims.

125.  However, as it has been accepted by Mr Shipp at the hearing, the claims for trademark infringement and passing‑off should be confined to the period after the breakdown of the negotiation (that is, after 22 November 2012). 

The defendants’ Counterclaim

126.  The defendants’ Counterclaim is founded on the Post‑Expiry Agreement and the implied term and it is alleged that the 1^st plaintiff was in wrongful repudiation of the agreement.  The Post‑Expiry Agreement having been rejected, the Counterclaim must fail. 

Reliefs

127.  With regard to the reliefs sought in the summons for summary judgment, Mr Shipp has indicated that the plaintiffs will not pursue the orders in paragraphs 1(1), (3), (7) and (9). 

128.  For the reasons discussed above, I am satisfied that the plaintiffs are entitled to the following reliefs:

(1) Judgment against the 1^st and 3^rd defendants for their respective breach of clauses 7.2 and 21 of the Agreement, with damages for such breach to be assessed;

(2) Judgment against the 1^st and 3^rd defendants for damages in respect of the goods supplied under the shipment to the 1^st and/or 3^rd defendants under invoice dated 2 November 2012 together with freight and storage of the goods, to be assessed;

(3) As against the 1^st to 8^th defendants, injunctive orders in terms of paragraphs 1(5), (6), and (8) of the summons;

(4) As against the 1^st to 8^th defendants, an order in terms of paragraph 1(10) of the summons, but such damages or enquiry as to damages or account of profit should be confined to the period after 22 November 2012;

(5) As against the 1^st to 8^th defendants, orders in terms of paragraphs 1(11) and (12) of the summons.

129.  I would direct that the assessment of damages under (1), and (2) in the preceding paragraph should proceed and be heard together with the assessment / enquiry as to damages / account of profits under (4), and that such assessment or enquiry shall be heard by a judge.

130.  The 2^nd to 10^th defendants’ Counterclaim is dismissed.

Plaintiffs’ application for security for costs

131.  The plaintiffs’ application for security relates entirely to the Counterclaim.  As the Counterclaim has been dismissed, no order for security needs to be made. 

Defendants’ appeal against refusal to order plaintiffs to give security

132.  In light of my ruling in the summary judgment application, I am satisfied that there is a good likelihood that the plaintiffs will recover substantial as opposed to nominal damages from the 1^st to 8^th defendants.  That being the case, I do not consider it right to order the plaintiffs to give security for the assessment stage of this Action.  I will dismiss the appeal by the 1^st to 8^th defendants against the decision of Master K Lo given on 30 April 2014.

Costs of the applications and appeal

133.  I will make the following costs orders nisi in respect of the various applications.

134.  The costs of and occasioned by the application for amendment of the Statement of Claim be to the defendants.

135.  The plaintiffs’ costs of the application for summary judgment — including costs of prosecuting their claim up to the date of this Decision (but excluding costs already incurred, if any, in relation to the assessment or enquiry of damages or account of profits) and costs in defending the Counterclaim — be paid by the defendants.

136.  Although no order is made on the plaintiffs’ application for security for costs, the costs for the application should in my view follow the event of the dismissal of the Counterclaim. Accordingly, I would order the costs of the plaintiffs’ application be borne by the 2^nd, 4^th to 10^th defendants.

137.  The costs of the appeal against Master K Lo’s decision be borne by the 1^st to 8^th defendants.

138.  All of the above costs are to be paid forthwith, to be taxed if not agreed.

Orders

139.  I would invite the parties to agree the terms of the order for the disposal of the summary judgment application in light of my decision    in paragraphs 128 to 130 above.  The orders for the other applications and the appeal should be drawn up in the usual manner.