Zymurgorium Ltd v Hammonds of Knutsford Plc

Hearing dates: 11, 12, 13, 14 May 2021, 7, 8, 9, 10 and 17 June 2021

This judgment was handed down in private at 12.00 on 13 August 2021. I direct that no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.

INTRODUCTION Background

The Trial

THE ISSUES

THE LAW Construction

Implied Agreements

THE EVIDENCE Approach to lay witness evidence

Summary of evidence (1) — The development of the relationship between ZL and HOK

DISCUSSION Assessment of the witnesses

Issue 1 — Interest on the Claim

CONCLUSION

Note – in this judgment, the main players and concepts are referred to by abbreviation. The appendix to the judgment contains a list of the various abbreviations used.

INTRODUCTION

Background

The Claimant, Zymurgorium Limited (“ZL”), is a company established by Aaron Darke (“AD”) and in which latterly his brother, Callum Darke (“CD”) has worked. It was incorporated in September 2016 and is the continuation of an unincorporated business established by Aaron Darke in order to produce gins and gin liqueurs 1. The Defendant, Hammonds of Knutsford Limited (“HOK”), is a well established company founded in 1960 by Tony Hammond, the father of the current managing director, Jonathan (generally known as “Jonny”) Hammond (“JH”). It is involved in wholesaling drinks products.

From late 2015 until late 2018, HOK and ZL had a commercial relationship which was associated with a rapid expansion of ZL. By way of indication of that growth, when their relationship started, ZL did not meet the threshold for VAT registration; by July 2018, HOK's monthly sales of Zymurgorium products exceeded £1 million and, in the month of November 2018 alone, they exceeded £1·7 million. In a similar vein, ZL turned over £7·3 million in the year ending 31 December 2018, making a pre-tax profit of £2·8 million.

The core terms of the relationship between HOK and ZL were never reduced to writing. There is an issue as to whether the relationship of the parties was governed by an overriding contract. HOK contends that such a contract, which it calls a Master Wholesale Agreement (“MWA 2”), arose as a result of discussions in a meeting on 16 November 2015, it subsequently being varied, and further that the relationship between the parties in respect of supplies to particular customers were determined by Specific Supply Agreements (“SSAs”). The relationship ended abruptly and acrimoniously in December 2018, when the Defendant discovered that ZL was had started to supply directly to another wholesaler, Matthew Clarke Bibendum 3 (“MCB”), to whom previously HOK had supplied ZL's products. HOK treated this direct supply as a repudiatory breach of the MWA and/or SSAs and, by letter dated 20 December 2018, purported to accept the breach.

At the time of that letter, ZL had issued outstanding invoices to HOK for products that it had supplied in the total sum of £682,265. It sues on those invoices. HOK admits its liability on those invoices subject to a small issue about interest and a defence by way of set off of a counterclaim. The counterclaim is for losses caused by the alleged repudiatory breach by ZL of the terms of the MWA and/or SSAs.

ZL deny the existence either of an overarching agreement in the form of the MWA or the individual SSAs. Further, it alleges that, if such agreements did exist and were relational in nature, HOK was in breach of those agreements by developing a product range called Imaginaria, that was launched in early 2019 and that was intended to (and did) compete with ZL's products.

The Trial

The trial began on 12 May 2021 with a time estimate of nine days. As is explained more fully below, it quickly became apparent during the trial that it was unlikely that there would be sufficient time to deal with all of the evidence and submissions. Accordingly, it was agreed that all of the lay evidence would be heard, followed by closing submissions on issues of liability. Thereafter a further hearing would be convened to deal with the quantification of the counterclaim, if the Defendant succeeded on the liability issues.

Matters were further complicated by the illness of counsel, which caused the loss of most of the original listing. As a result, the court only sat on four days 4 of the original 9 day listing in May 2021, then resumed in June 2021, sitting from 7 to 10 June 2021 to deal with the remainder of the evidence, 15 June 2021 to deal with applications to vary the costs budgets (which applications are not relevant to the issues dealt with in this judgment) and 17 June 2021 for closing submissions.

The following witnesses were relied on by the parties:

All save CG gave oral evidence.

HOK's case in summary

It is common ground between the parties that, on 16 November 2015, a meeting took place at HOK's premises, between JH on behalf of HOK and AD on behalf of ZL. HOK contends at paragraph 17 of the Re-Amended Defence and Counterclaim (“RDCC”) that, during the meeting, it was agreed:

9.1 that HOK would promote ZL's drink products generally to the marketplace;

9.2 that HOK would act as ZL's wholesaler purchasing ZL's products from ZL and reselling them to HOK's customers;

9.3 that ZL would supply its drink products to HOK to meet the demand for those drink products that HOK generated and received.

This is the agreement which has been called the Master Wholesale Agreement (MWA).

At paragraph 18, it is pleaded that there was to be implied into the MWA that it could be terminated by either party giving reasonable notice. That term is said to be implied either:

10.1 At the time the original MWA was entered into;

10.2 When the MWA was varied in the circumstances set out at paragraphs 19A and 19B of the MWA;

10.3 When the MWA became a relational contract in the circumstances set out at paragraphs 19C and 19D of the MWA.

As to variation, the Re-amended Defence and Counterclaim (“RDCC”) puts the case in considerable detail:

“19A. Prior to HOK's involvement, Mr Darke was operating ZL by himself, from a small rented industrial unit in Irlam, and creating the recipes, mixing, bottling and labelling the drinks himself, as well as delivering them to HOK in person. Mr Darke had few industry connections, little experience of the industry, and no additional personnel resources until his brother Callum Darke joined him on a date believed to be in late 2016. During the course of 2016 and 2017 HOK worked closely with ZL, to enable Mr Darke to develop ZL's business, and Mr Darke relied heavily upon HOK's assistance, expertise and resources. For example:-

19A.1 HOK personnel communicated with ZL, often numerous times a day, and provided ZL with confidential information which would not normally be supplied in the course of a producer-wholesaler relationship, such as information concerning new customers and their requirements, anticipated orders and volumes, and other information relevant to ZL's production schedules, stock availability and delivery dates.

19A.2 In March 2017, Mr Hammond advanced the sum of £27,000 to ZL by way of an EIS investment into ZL to enable ZL to purchase a new still. Pending finalisation of the investment structure, Mr Darke sent Mr Hammond an email dated 23 March 2017 attaching a ‘Rough for a Loan’ which acknowledged the preference for the sum to be converted to equity with EIS “when shares are ready”; that the repayment method could be switched to “monthly instalments at a fair market rate of interest”, and that ZL “promises to make this a freaking awesome adventure and [Mr Hammond] must promise to come down and have a turn on the still otherwise this contract remains null and void.” Mr Darke met with Mr Hammond's financial advisor concerning Mr Hammond's investment into ZL with a view to obtaining HMRC's approval for an SEIS/EIS.

19A.3 HOK provided ZL with financial assistance and cash flow needs, for example by arranging and paying for transport of ZL's goods as and when ZL required, and storing and/or paying for storage of dry goods and raw materials (charging only the base cost to ZL, without any profit mark-up) that ZL required to produce its products to sell to HOK.

19A.4 HOK provided ZL with practical and personnel assistance when Mr Darke struggled for lack of resource, for example sending HOK staff or members of Mr Hammond's family to help out at the ZL distillery.

19A.5 Mr Darke once complained that HOK was selling a product that competed with one of ZL's products. HOK subsequently declined to list a number of brands and/or products that would have competed with ZL, in circumstances where HOK would otherwise have wanted to and benefited from listing those brands. On another occasion, HOK checked with Mr Darke whether ZL would object to HOK stocking a particular product. Mr...