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IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION TECHNOLOGY AND CONSTRUCTION COURT
Royal Courts of Justice Strand, London, WC2A 2LL 3rd August 2012
B e f o r e :
MR JUSTICE AKENHEAD ____________________
____________________
Marc Rowlands QC (instructed by CJ Hough & Co) for the Claimant David Head (instructed by Hogan Lovells) for the Defendant Hearing dates: 2-5, 9-11 and 17 July 2012 ____________________
HTML VERSION OF JUDGMENT ____________________
Crown Copyright ©
Mr Justice Akenhead:
This case relates to an agreement between the parties for the exclusive distribution of satellite tracking devices for aeroplanes or helicopters. Unfortunately, the relationship between the parties broke down some three years into the agreement and thus it is that the parties find themselves in litigation. The case raises interesting issues about repudiation, acceptance of repudiation by conduct, contractual interpretation and estoppel by convention and representation as well as promissory or proprietary estoppel.
Satellite Tracking
Satellite tracking devices are used in different applications: land, marine, personnel and aviation. Although the technology used in each market is similar, aviation is different because the devices have to be tested, certified and approved to demanding environmental standards. The aviation devices are accordingly more expensive than those for other applications although the light aircraft sector of the market is somewhat cheaper being less regulated than airline aeroplanes.
Any satellite tracking device requires two distinct functionalities. It needs to know precisely where it is and it achieves this in the same way that any "SatNav" device does, by comparing its position with the GPS satellite array. The GPS system was originally a US military system, but is now used by civilian markets. Russia has its own system, called Glonass, which does the same thing albeit using slightly different technology and different satellites. Secondly, it needs to be able to communicate that position to the end user. It does this by sending data to a satellite, which then forwards it to a ground station. This is the "Sat-com" element of the device. Depending on the level of sophistication of the technology in the device, and the level of service that the user has paid for, the data can range from one way, infrequent, short data bursts and more recently into voice and broadband transmission. From the ground station the data can be distributed to the end user in a number of ways, most commonly nowadays by web based applications.
There are two principal satellite systems providing worldwide sat-com coverage: Inmarsat and Iridium. Inmarsat was founded in 1979 as an inter-governmental organisation in order to provide a sat-com network for shipping. The satellites were launched in the early 1980s and are positioned in geostationary orbit (that is, 22,000 miles above the earth's equator) and they travel at the same speed and in the same direction as the earth as it rotates on its axis; so from a specific location on the earth they appear to be stationary and effectively remain fixed in relation to any point on the earth's surface. A small number of satellites can provide global coverage (with the exception of the Polar Regions). In the early 1990s the International Maritime Organisation stipulated that all ships over 300 gross tonnes were required to carry an Inmarsat terminal that could send position reports, distress and telex messages. Inmarsat defined the necessary standard for the terminal (known as the "Inmarsat C" standard). One of the companies that produced an Inmarsat C terminal was Thrane and Thrane ("T&T"), a Danish company: its product was called the "Maritime C" terminal, and it sold in significant numbers. T&T decided to design an equivalent product for the aeronautical market, called the "Aero-C. The Aero-C was first produced in 1993 and remained in production until 2008.
The Iridium satellite constellation, by contrast to the Inmarsat system, comprises 66 satellites in low earth orbit (typically at an altitude of around 500 miles above the earth's surface). Iridium was conceived and launched by Motorola in the 1990s in order to provide mobile telephone services. In the event, other mobile phone service providers rapidly built base station networks in areas of high, and wealthy, populations: the Motorola model, although capable of providing mobile phone access globally (as opposed to having to be within range of a base station) was unable to compete on price, and was left with limited markets (oil exploration, disaster relief, search and rescue and military) which were insufficiently lucrative, and Iridium entered Chapter 11 bankruptcy protection in 2001, emerging in 2003. One of its main customers was and is the Department of Defence in the United States.
The respective merits and demerits of the two systems are the subject of much debate in the sat-com world, and indeed in this case, as the witness and expert evidence reveals. The principal points of contention are technical (coverage and availability) and political (because of Iridium's connection with the US, and in particular the Department of Defence). Both systems (Inmarsat and Iridium) therefore started life with a particular market in mind. In Inmarsat's case it was safety related maritime tracking, distress reporting and telex communication (that is, principally data communication). Iridium was initially intended to provide voice communication services for mobile phone users. In fact, both systems are now used to provide sat-com across the broad range of markets, that is: maritime, terrestrial, aeronautical and personal and in both data and voice. Iridium was until May 2012 unable to be used in Russia legally.
The end-user is the purchaser of a tracking device, called a terminal, which is installed on an asset (an aeroplane, a ship or vehicle) and enables the user remotely to monitor the status and location of the asset. Most end-users operate a fleet of assets, such as security companies tracking vehicles in the Middle East or fleet owners tracking their ships. The terminals, which are small pieces of hardware about the size of an A5 sheet of paper and about 5 centimetres deep, are fitted with GPS technology that enables them to communicate their position to orbiting satellites using radio frequency waves. The terminals are fitted with an operating script that enables the user to program the terminal for autonomous operation and set configuration parameters such as the rate at which messages are transmitted.
The satellite relays messages between terminals and an earth station that hosts the equipment cabinets owned by companies such as Satamatics Ltd ("Satamatics"), the former name of the Defendant. The antenna at the earth station is a large dish approximately 3 metres or more in diameter. An earth station converts the data to and from radio frequency signals suitable for transmission via satellite, and is the hub that communicates with the satellite, but it does not process user data as such. The earth station antenna is connected to a cabinet of electronics. The cabinet processes the messages received from, or to be transmitted to, the satellite. A number of cabinets can be connected to the same antenna and hence communicate with the same satellite. Each cabinet controls the air interface, which is the communication link between the satellite and the earth station. The cabinet uses the internet to send and receive the users' messages to Satamatics' data centres.
The data centres support the messaging applications through the temporary storage of user messages in both the send and receive directions. The data centres also support authentication and billing functions. Users access their data through web based application servers based at the data centre, or through their own application servers that connect to the data centre through a defined internet connection. The data formatted by the data centres is sent on to an internet application which the end-user can see on their computer. The application displays the messages sent from the terminal, including information on the location of the asset that it is fixed to. The end-user can also send messages from the application back to the terminal, using the same process but going the other way.
In order to access the satellites owned by Inmarsat or Iridium, companies such as Satamatics pay for airtime, which is effectively access to the satellite channels on the Inmarsat or Iridium network. The cost of obtaining access to the satellite network depends on how much bandwidth and power is required. There are a range of services providing different bandwidth and power; one of these services is the Inmarsat D+ service, which requires low bandwidth and low power. This makes it (relatively) low cost. Satamatics used the Inmarsat D+ service for the aeronautical tracking product that is the subject of this dispute. Having purchased airtime for the D+ service from Inmarsat, Satamatics passes the airtime costs on to its customers (in this case, ADS), with a mark-up, by billing them under a tariff system similar to those for mobile telephones: the higher the number of messages required, the higher the monthly airtime cost.
The Parties
Hans Karlsen is the founder and CEO of Airborne Data Services Limited and ADS (Aerospace) Limited, the Claimant in this action; I will refer to them both as "ADS". He is an expert in the aerospace industry and in particular the market for satellite communications. He has a degree in aeronautical engineering and an MBA from Witwatersrand University, and his entire career has been spent in aviation. Between 1986 and 1993 he worked for Inmarsat, the first provider of a global satellite constellation for mobile communications. At Inmarsat, in 1993 Mr Karlsen sponsored the necessary regulatory and approval certification of the "Aero-C", produced by T&T; this had been developed as an aeronautical version of a marine tracking device. Having helped obtain the relevant approvals for the Aero-C, Mr Karlsen left in 1993 to set up Airborne Data Services Limited, in order to obtain Airworthiness Certification for the Aero-C and to become a distributor for T&T, particularly for the Aero-C product.
By 2003, it was becoming apparent that the Aero-C, although an important product in the aerospace tracking market, was starting to become technically outdated, and Mr Karlsen decided to explore the possibility of producing a new product to exploit the growing demand of the "Aerial Work" sector of the aviation market (and in particular helicopters) for satellite tracking devices. This led to a meeting, in early 2004, with Satamatics, which produced satellite tracking devices for land, marine and personnel tracking, and sold airtime to the users of those devices on the Inmarsat network. This contact eventually led to the "Satamatics Exclusive Distribution Agreement" ("the Agreement"), executed by the parties on 20 December 2005, by which Satamatics was to produce the satellite tracking product that the parties had by then jointly developed (known as the SAT-111) and Airborne Data Services Limited was given exclusive worldwide distribution rights for an (automatically renewable) 5 year term. Mr Karlsen later decided to take advantage of a government initiative designed to assist small companies in the technology sector, only open to companies incorporated within 3 years of making the loan application. On 7 December 2006 ADS Aerospace Limited was incorporated and was granted a loan by Barclays Bank on 4 May 2007. On 4 April 2007 the Satamatics Exclusive Distribution Agreement was novated to ADS Aerospace Limited. Essentially both of Mr Karlsen's companies comprised him and his wife Marjorie. Airborne Data Services was dissolved in 2010.
Satamatics was a start-up company set up by a company called TRL Technology Limited in 2001. Its primary market was in satellite tracking devices and in particular the land and marine-based devices. At some stage in 2004, it was acquired by a number of what were described as "high net worth individuals". It launched its global Inmarsat D+ service in August 2001 and gained a wide range of licences in 2003. In 2003 it launched its new "SAT-101" satellite terminal device for land and marine services. In June 2005 it put on the market a lower cost device called the "SAT-201" for the same application. It incurred year on year losses at least up until about 2008. In 2009 it was acquired by EMS Technologies Inc and changed its name to EMS Global Tracking Ltd and in August 2011 EMS Technologies was acquired by Honeywell. During the course of Satamatics' relationship with ADS, it employed a relatively few number of employees, in the region of about 30. Its engineering director was Mr Hatherall; its CEO was Mr Chisholm until April 2008 when Mr Koutrouki, the former Chief Financial Officer, succeeded to that role.
The SAT-111
The SAT-101 was the first terminal developed and manufactured by Satamatics. It was developed in 2002-3 when Satamatics was still a new company, and it went on the market in 2003. The SAT-111, which is the subject of this dispute, is an aeronautical version of the SAT-101 It was developed for tracking land and marine assets such as cars, trucks and ships. It could send and receive messages and provide information as to its location. The main module of the SAT-101 unit was a low-cost plastic enclosure containing a printed circuit assembly ("PCA") which incorporates an electronics printed circuit board ("PCB") assembled with electronic components (together the "101-board"). The main module had several interfaces, which could be connected to other devices such as switches and sensors. The terminal could then be used remotely to control or monitor those other devices. The module could be powered from a supply of 9.6 volts to 32 volts or from a battery pack. There was also an antenna in a separate plastic enclosure to the main module, which contained the antenna itself, known as the "patch", together with a high power amplifier ("HPA") for transmission and a low noise amplifier ("LNA") for reception. Both the HPA and the LNA had to be in close proximity to the patch antenna to minimise signal losses and provide acceptable performance.
In order for a terminal to use the Inmarsat D+ network, it had to have Inmarsat Type Approval. This was effectively an acceptance certificate from Inmarsat, which required terminals transmitting on its network to be checked and certified to ensure that nothing would damage the network and satellites or cause interference to Inmarsat's other satellite services. The SAT-101 unit obtained Inmarsat Type Approval before it went on the market in 2003. The SAT-101 was purchased by customers requiring tracking and messaging services for land vehicles and ships. For example, a significant market for the SAT-101 was truck companies in South America.
Satamatics predominantly marketed the SAT-101 using distributors and value added re-sellers ("VARS") who would sell the SAT-101 and the accompanying airtime to end-users, adding a mark-up to what they paid Satamatics to make a profit. VARS, however, would often sell the terminal and airtime together with access to their own internet application. In the early days of Satamatics, it did not have its own application and so it had to sell hardware and airtime to VARS that could provide the end-user with an application.
Satamatics was first approached by Mr Karlsen of ADS in around late 2003 or early 2004. At this point, Satamatics was still in its infancy and not yet making a profit. ADS wanted to develop a satellite tracking terminal for the aeronautical market, using the Inmarsat satellite system. Mr Chisholm held the initial discussions with ADS. Mr Hatherall became involved some months later from the engineering side. Satamatics had no experience at all of the aeronautical market; its products were developed for tracking and monitoring land and maritime assets. The intention was to combine ADS's knowledge of the aeronautical market with the technology that Satamatics had already developed in order to produce a new aircraft tracking device. The background to the development of the SAT-111 was reflected by Mr Chisholm in an email dated 22 May 2006 explaining that Satamatics had relied on ADS's "market knowledge" and setting out how the SAT-111 had evolved.
As Mr Karlsen was familiar with the aeronautical market, and had a technical background, he and Mr Hatherall worked together to develop the new aircraft tracking device. They had initial discussions and e-mail exchanges aimed at defining the requirements and allocating development responsibility between ADS and Satamatics and they agreed that Satamatics would develop the electronics and ADS would provide cabling, antennas and installation services. The antenna selected was made by Sensor Systems and was designed to sit on the outside of the aircraft.
Because the antenna did not house the necessary electronics, these were to be provided by Satamatics who used the HPA and LNA from the SAT-101. It was agreed with ADS that a plastic enclosure was not suitable for the aero environment where expectations were for more rugged equipment. A milled aluminium metal enclosure was selected to encase the HPA and LNA electronics. It would sit very close to the antenna but inside the aircraft. This box became known as the "HPA" also. Satamatics also developed the main module containing the 101-board and suitable switches and connectors, which would sit in the cockpit of the aircraft and which also required a milled-out aluminium enclosure of its own. This main module became known as the Satellite Data Unit ("SDU").
The whole SAT-111 terminal therefore consisted of three separate parts: the SDU, housing the 101-board, and located in the cockpit (supplied by Satamatics), the HPA located inside the aircraft but near the antenna (supplied by Satamatics) and the Sensor Systems antenna (sourced by ADS and located on the exterior of the aircraft). Satamatics would sell the SAT-111 unit to ADS. ADS would add the Sensor Systems antenna and cabling, which were sourced by ADS, to the SAT-111. The whole package (SAT-111, plus antenna and cabling) was called the ADS-100. ADS was to install the units in the aircraft. The end-user web based application was provided by Satamatics and was a version of Satamatics' standard application branded for ADS; that is, Satamatics' logos etc were replaced with those of ADS. The application provides the user with messaging and tracking facilities and shows a map view of the location of their assets. Satamatics also included "Doppler compensation" in the SAT-111, which was not required for the SAT-101. Doppler compensation takes into account the fact that aircraft are travelling at high speeds, which means that the frequency of any waves emitted from the aircraft, such as the radio waves by which the SAT-111 transmits messages to the satellites, is affected. Without Doppler compensation, the transmission of messages would not be reliable above certain speeds.
Manufacture of the SAT-101 and enclosures was subcontracted to third parties and one of those subcontractors was responsible for the final assembly of the SAT-111. Although the electronics behind the SAT-101 and the SAT-111 were almost identical, Satamatics had to obtain a separate approval for the whole SAT-111 system from Inmarsat because the SAT-111 used a different antenna. In addition to Inmarsat Type Approval, equipment like the SAT-111 has to be "CE" marked in line with applicable European Directives; this confirms conformity with the necessary (European) safety requirements and that the system will not interfere with or suffer from interference from other electronic devices. Also D0-160D approval was required. D0-160 testing involved a specification set by the Radio Technical Commission for Aeronautics. The standard test applicable to the SAT-111 at the time was D0-160D, although it has later been revised. In order to obtain D0-160 approval, a unit had to be taken to a test house so that it could be tested. This enables the manufacturer to prepare a Declaration of Design and Performance ("DDP") which set out what tests have been undertaken on the unit and confirms that the unit has passed those tests. Before the unit is then installed on an aircraft, the installer would review the DDP to check that the item had passed the test requirements applicable to that type of aircraft.
Satamatics produced two prototypes of the SAT-111 unit in May 2005, although Mr Hatherall had been discussing the requirements and design with Mr Karlsen since early-2004. I accept Mr Hatherall's evidence that in practice, as the first working model, a prototype gives an early indication of a potential product. It is used to demonstrate feasibility, to identify whether any alterations are required, and to enable tests to take place. Even minor changes to the electronics of a product require a level of re-testing and can lead to further significant changes having to be made to the unit. A prototype is produced before the product is formally tested and certified, and as such it is not and should not be provided to end-users unless in limited quantity for testing purposes only. Indeed, there are often regulatory prohibitions on selling a product without the necessary approvals.
At ADS's request, Satamatics sent the two prototype SAT-111s to Helog Lufttransport KG ("Helog") at the beginning of June 2005. Helog operated helicopters in Sudan for the UN and had agreed to test the SAT-111 and provide feedback on its performance. The SAT-111 prototypes were not production units and it was intended that they would be swapped once fully tested production grade units were available (which understanding was reflected in Satamatics' Oliver Hilton's email to Mr Karlsen on 22 May 2006). Mr Karlsen also acknowledged that these were prototypes and that they were not tested as comprehensively as full production units, as set out in his email to Helog on 22 May 2006. Between producing the prototypes and finalising the production grade SAT-111 units, both the hardware and the messaging script was altered. Once the production grade units were finalised, the product was still not fully-fledged as it required Inmarsat Type Approval (which was obtained on 5 August 2005) and had to undergo D0-160D testing: this was completed at the beginning of March 2006.
The SAT-201
This was a new tracking device introduced in 2005 by Satamatics for land and marine use and, unlike the SAT 101, it was housed in a single unit, albeit with some similarities. The SAT-201 comprised a modem board and an active antenna board. It complied with up-to-date requirements.
The Satamatics Exclusive Distribution Agreement
The Agreement dated 20 December 2005 contained the following preambles:
Clause 1.1 contained definitions:
Clause 1.3 stated that the "attached Schedules and recitals form part of this Agreement", albeit that the Agreement prevails in the case of any conflict.
Clause 2 states:
Clauses 3 and 4 provided as follows:
Clause 9 was headed "Warranties and liability" and provided, as follows:
Clause 10 provided for termination by either party for material breach or for specified events such as liquidation or arrangements with creditors but contained additionally these two sub-clauses:
Clause 13 contains material clauses:
Schedule 1 to the Agreement set out the conditions of sale for the Products. Relevant terms were:
Schedule 2 dealt with the conditions applicable to the "Supply of Airtime" and these included a charging regime for such services.
A number of conclusions, by way of interpretation of the Agreement can readily be drawn:
Various issues arise between the parties in relation to the limitations of liability contained in Clauses 9.3 and 10.1. Considering, first, Clause 9.3, it is clear that the wording is not particularly clear in referring to liability to ADS "by reason of any representation or implied warranty, condition or other term or any duty at common law, or under the express terms of this Agreement"; commercially construed however, it must relate to misrepresentation or breach of contractual or common law duties. What is excluded however is liability "for any consequential loss or damage" and an example of this is given as "loss of profit". However, loss of profit does not define "consequential loss or damage" it is simply a type of consequential loss or damage. There is a slight clue in the word "occasioned" which follows; "occasioned" has a broader connotation than "caused". The word consequential is used in Clause 3 of Schedule 1 as excluding liability for "any direct, indirect or consequential loss" relating to delay; that clause recognises, globally, the difference between direct on the one hand and "indirect" or "consequential" loss "caused directly or indirectly" by delays. In my judgement, the word "consequential" in Clause 9.3 clearly means something other than "direct".
There is some authority for the proposition that "indirect" or "consequential" loss is often to be construed as loss or damage which falls within the second limb of Hadley v Baxendale , although each contract needs to be construed on its own terms. However, parties who draft contracts which are subject to English law can be taken to appreciate the difference between the two limbs. In this case, I have no doubt that, properly interpreted, Clause 9.3 is simply excluding that type of loss which falls within the second limb. If it was intended to exclude effectively all loss, the word "consequential" is unnecessary. One can assume however that it was put in there for a purpose which was to explain to the reader that direct loss was not being excluded but more remote loss which might be occasioned by the breach in question was being excluded. Mr Head for the Defendant sought to argue that that loss of profit on sales attributable to a refusal to supply the goods was "consequential" and within the second limb in any event. That is wrong in my view because the whole purpose of the exclusive distribution agreement was distribution and onward sale by ADS to customers and it must have been within the reasonable contemplation of the parties that a wholesale refusal to supply the goods would result in the inevitable loss of profit on those onward sales. Such loss therefore is not "consequential"; it is direct and firmly within the first limb of Hadley v Baxendale .
Turning to Clause 10.1, looking at the words used only in that sub-clause, superficially the provisions for mutual termination rights in Clause 10 ("the following provisions") represent "the entire liability" of Satamatics. That in itself is somewhat odd because Satamatics can terminate for breach by ADS. Taken literally, this is a very extreme clause. Although it is said to be subject to Clause 9 (and in particular Clause 9.2 whereby Satamatics's liability for unsatisfactory quality or breach of specification is limited to repair or replacement or repayment of any price paid), a wholesale refusal to supply goods can only be met (if the Defendant is correct in its argument) by a termination for breach which leaves ADS without a remedy, for instance for sums paid for goods which have not been delivered. Of course, if that is what the parties really intended, they can legislate for that but the wording must be clear. The wording here is not clear because Clause 10.5 then throws open the door by saying that the termination rights are "without prejudice to any other right or remedy…in respect of…any…breach". What that is saying in effect is that the parties' rights in relation to other breaches are and remain open and unrestricted. That is subject to Clause 9.2 relating to defects for which the liability remains limited as set out in that sub-clause.
The History
The reality is that ADS were unable to sell any significant number of the SAT-111 (or ADS-100) devices. Between the date of the Agreement in late 2005 and April 2008, only 17 were sold, mostly to Helog and a German company called FAI; in addition, two prototypes were provided to customers. This was not attributable to any default on the part of Satamatics but it was essentially attributable to the fact that it had limited appeal in the market, largely because of price. Many potential customers preferred to use the cheaper land-based versions, albeit that they were not accredited for aeronautical use. These sellers were known colloquially as "box shifters". In the spring of 2007, ADS lost its main customer, Helog, in an acrimonious way, albeit Mr Karlsen ultimately accepted that this was not attributable to Satamatics. By the end of 2007, ADS had "given up on Africa" which had been a prime focus of ADS's sales efforts. There is no doubt that throughout most of the period 2005 to 2008 Mr and Mrs Karlsen were enthusiastic and optimistic about the potential for sales of the ADS-100. For instance, as early as August 2005, ADS was anticipating sales of 100 or more in 2006. Again, it is also clear that between them they made major and extensive efforts to sell the ADS-100.
One problem which did emerge, but which was not the cause of the poor sales, was that a European Union Directive, the Restriction of Hazardous Substances Directive 2002/95/EC ("the RoHS Directive") took effect on 1 July 2006. This restricted the use of six substances, including lead, in new electrical and electronic equipment. Parts of the 101-board (and therefore parts of the SAT-111) were manufactured using a lead-based solder, which would not comply with the RoHS Directive. Moving to lead-free solder also had the effect of making certain components obsolete. While Satamatics could have developed a RoHS-compliant version of the 101-board, this would have meant a substantial (and thus costly) re-design. Satamatics and ADS were aware of the RoHS Directive before it came into force and before the SAT-111 development was fully complete. However, this was not seen as a reason to delay or divert the design and development of the SAT-111 because as was hoped at the time if ADS was successful in marketing and selling the ADS-100, then in order to keep supplying ADS with SAT-111s Satamatics could and would re-design the SAT-111 to ensure it was RoHS-compliant. By the end of February 2006, it was resolved internally within Satamatics that the RoHS Directive did not apply to aircraft applications and therefore did not impact upon production or sales of the SAT-111. However, SAT-101-boards (with the lead solder) would have to be sourced and retained in sufficient numbers to satisfy orders for the SAT-111.
The impending impact of the RoHS Directive coming into force had led to the design, development and manufacture of the SAT-201 and units were in production by June 2005. The SAT-201 provided a lower level of functionality compared to the SAT-101 (and was cheaper as a result), but for end-users wanting the same level of functionality in the SAT-201 as in the SAT-101, Satamatics developed an additional unit called the GEM-100. The GEM-100 was designed to operate with the SAT-201 to provide the full spectrum of functionality offered by the SAT-101. The GEM-100 and SAT-201 had the same mounting arrangement and almost identical form factors to the SAT-101 main unit and SAT-101 antenna respectively, which made it easier to replace SAT-101s that had already been installed with a SAT-201 plus GEM-100. A Technical Report for the Satamatics Board meeting of 8 February 2006 stated:
The issue of RoHS compliance was discussed in several internal meetings at Satamatics, because it was felt important to decide how many more 101-boards were needed to be produced before 1 July 2006 so that Satamatics had adequate stocks for those customers requiring SAT-101 components. Satamatics personnel also discussed how the 101-boards would be allocated to customers. Satamatics considered that it could not keep manufacturing 101-boards in their current iteration for use in SAT-111 units because several of the components were obsolete or no longer available. If ADS had obtained orders for large numbers of SAT-111 units, then Satamatics was committed to design, develop and produce a RoHS-compliant version of the 101-board for use in the SAT111. However, Satamatics was not prepared to produce a RoHS compliant version if there was no firm likelihood of significant sales of SAT-111 units; what it was prepared to do was to set aside what seemed to be more than enough 101-boards exclusively for ADS so that, should ADS order any more SAT111s, Satamatics would be able to fulfil those orders.
On 14 February 2006, Mrs Karlsen emailed Mr Chisholm, the Chief Executive of Satamatics,:
Mr Chisholm replied the following day;
By the end of February 2006, it was resolved internally within Satamatics that the RoHS Directive did not apply to aircraft applications and therefore did not impact upon production or sales of the SAT-111. However, SAT-101-boards (with the lead solder) would have to be sourced and retained in sufficient numbers to satisfy orders for the SAT-111. This was because the SAT-101-boards were sourced within Europe.
At about this time, plans had been put in place to design what was called the SAT-221 which was the combination of the SAT-201 and the GEM-100. Indeed, by mid May 2006 some preliminary design work had been done. This version of the SAT-221 which was intended to replicate with non-obsolete parts the SAT-111 was not taken any further. It is not to be confused with the later version of the SAT-221 which was to emerge as a prototype in mid-2008.
The two SAT-111 prototypes produced by Satamatics were installed in the latter half of 2005 and proved to work well. They were replaced by standard production units later in the year. 2006 proved to be the best year for sales with 10 SAT-111s supplied to and sold by ADS. Although not envisaged by the agreement, ADS paid deposits on 10 SAT-111 units in advance in March 2006; this reflects at least in part ADS' wish to secure such units. At around this time, Mr Karlsen had some e-mail contact with a Russian gentleman, Mr Boreiko, of a Russian organisation called Business Navigator Ltd about the possible supply of units for helicopters in Russia. This communication ceased in April 2006 and came to nothing.
There was and appeared to be a reasonably good working relationship between ADS and Satamatics. For instance Mr Karlsen e-mailed Mr Hatherall on 17 May 2006 suggesting a SAT-201 enclosed in a SAT-111 box as a cheaper system possibly for the Australian, New Zealand and UN markets. Mr Hatherall replied: "not a problem technically". But this came to nothing also however. Some frustration was creeping into the relationship, largely due to the fact that sales were not taking off. Mr Chisholm felt that he had "lost the plot" in his e-mail of 22 May 2006 to Mr Karlsen; he started from a position that Satamatics had no knowledge of the aeronautical industry and was relying on ADS and was concerned at the possibility of having to produce a further tracking device. Mr Karlsen smoothed things over in his reply saying that he and his wife were working "7 day weeks" and were "gaining a lot of interest". Mrs Karlsen in her e-mail in response said that Mr Chisholm's e-mail was "below the belt" saying "we have bet our future on this product and have sunk a lot of our personal resources into it and after today, I feel that it is slipping away." This verbal spat was, however, resolved amicably.
There followed however an example of Mr Karlsen pushing the boundaries at least with potential customers. On 12 June 2006 he wrote to a Mr Marre of the World Food Programme saying that ADS had "decided to go ahead with the development of the cheaper ADS-200 entry level system, which does not have the functionality of the ADS-100, but uses the same aeronautical antenna." He actually prepared an "Avionic Specification" for the ADS-200 at this time although it was not in production and had not even been designed let alone approved by Satamatics. This assertion was simply misleading and it highlights that he was prepared to promote a product as if it was in development when it clearly was not. Although the Avionic Specification was sent to Satamatics at this time, Mr Hatherall made it clear that no decision to proceed had been made.
In July 2006 the possibility arose of providing 40 SAT-111s to a Spanish customer. Mr Karlsen was prepared to offer a reduction to his potential customer for a bulk order, which is perhaps not surprising; he asked for and obtained the offer of a comparable reduction per unit for such a large order from Satamatics. He suggested changes to the electronics but Satamatics was reluctant to change them. No order was secured. Later in August and November 2006, at Mr Karlsen's request Satamatics offered a discounted price to particular clients.
In October 2006, Mr Karlsen told Mr Hatherall that his sales forecast for SAT-111s was that there was "a very high probability that he will require a further 50 units and optimistically this could increase to 80 units", this being recorded in his internal e-mail on 27 October 2006. There is little or nothing in the disclosed documents at this time which justified any probable or indeed any possible sales approaching anything like these numbers.
On 21 November 2006, Satamatics' Board received a technical report to the effect that the "SAT-201/GEM solutions will be deployed once stocks of SAT-101 have been depleted (probably early in the New Year)". The GEM-100 was in the process of being developed. The boards were not so depleted.
On 28 March 2007, the newly formed ADS in its application to the DTI for a loan indicated that in its newly formed status it has been working together with Satamatics over the previous two years (which, as such, was not correct because it was only incorporated in 2006). It also referred to looking at future Research and Development "to develop the next generation system". There had been little or no discussion with Satamatics over the previous nine months about the development of such a system.
By 29 May 2007, Mr Karlsen was reporting that ADS was "getting a lot of interest from Russia" and that ADS had "already submitted several quotations". Projects said to be those for which ADS was bidding were in Moldavia and "Krysakstan". There was no disclosure of any such bids or quotations and the fact that Mr Karlsen did not know the name of the second country in which he was supposedly bidding suggests that the quotations were at best oral and in any event certainly informal. Mr Chisholm replied suggesting that Russia was "a big issue" but that he could provide an introduction to Satamatics's partner who had a relationship with the main satellite licence holder in Russia. History does not relate that these quotations or the interest from Russia were furthered; certainly they came to nothing.
Mr Chisholm asked ADS why there were such low sales. The answer on 20 July 2007 was the presence of box shifters. Mrs Karlsen wrote ruefully: "it seems we underestimated how many serious operators that are out there compared to the cowboys". However, she said that ADS remained committed and appreciated Satamatics' commitment; she and her husband had recently re-mortgaged their house "to keep going".
During the latter part of 2007 Satamatics upgraded its network from the Inmarsat-D+ service to support the Inmarsat-D2 service (called ISAT M2M, Enhanced D+, or D2), which provided substantially quicker position reporting delivery times and the opportunity to significantly increase the reporting rates of the SAT-101 and SAT-201 from once every 2 minutes to once every 30 seconds (4 fold increase), as well as to increase the size of the message sent from the mobile terminal from 84 bits to 204 bits. The majority of existing D+ terminal firmware could be upgraded to D2. Also the time to first transmission was reduced from approximately 6 minutes when using D+ to approximately 1 minute when using D2.
During 2006 and 2007 it was becoming apparent that the Aero-C system would become obsolete within a few years and there was no indication that T&T would produce a substitute. It seemed to Mr Karlsen that T&T's priority was to get into the more complex voice and data aeronautical systems that made use of their maritime technology. As a result, Mr Karlsen perceived that a market opportunity might be emerging to develop an Aero-C substitute. Since Iridium was excluded from Russia, he thought that there was also an increasing demand for an Inmarsat based aircraft tracking solution. Satcom1 (a Danish company dealing in satellite airtime) was working with Scandinavian Avionics, who had extensive experience with Aero-C in the CIS (the Russian related Commonwealth of Independent States). Satcom1 approached Mr Karlsen and encouraged him to start discussions with Scandinavian Avionics to serve the Russian air transport market. Since he believed that ADS had the only viable aeronautical tracking product that could be a substitute for Aero-C, he felt that ADS had an ideal opportunity to work with Satamatics and Scandinavian Avionics to access the Russian market.
In November 2007, Karina Larsen (the CEO of Satcom1) was considering a substitute for Aero-C and she sent an email to the managing director of Scandinavian Avionics, Mr Truelsen and Mr Karlsen on 21 November 2007, about the ADS-100 system stating:
Mr Karlsen emailed Mr Truelsen some information on the SAT-111 and on 22 November 2007 Mr Truelsen replied:
During November and December 2007 ADS had discussions with Scandinavian Avionics relating to the technical and supply issues of the SAT-111.
By 11 December 2007, Mr Karlsen was suggesting to Satamatics that he believed that ADS should target Russia, the Gulf Region and the European Union. He wrote to Satamatics that ADS was "currently negotiating with [the company that is doing the installations in Russia] to select ADS-100". This was an exaggeration because, although there were some discussions with Scandinavian Avionics, these were not negotiations.
By the end of the year, internally, Satamatics was recognising that it had "very limited capability to offer SAT-111 moving forwards as it was based upon the SAT-101 (vis-a-vis stock and RoSH compliance)", as set out in Mr McQueen's e-mail of 13 December 2007, at which time it was understood that it had no plans to develop the SAT-201 and GEM-100 equivalent which had been spoken about some 18 months before.
On 10 January 2008, T&T issued a formal "Last buy notice" that the Aero-C system was to be phased out and stocks would run out in mid-2008. In fact stocks did not run out for several more years and Aero-Cs continued to be sold.
On 15 January 2008, Satamatics had a review meeting and Mr Hatherall reported that ADS had called for two more SAT-111 units. It was recorded that "Moving forward, a business case will be required to migrate to SAT-201". This reflected a concern that the SAT-111 sales had not been good.
On 22 January 2008 Mr Karlsen e-mailed Satamatics stating that ADS was "working with a [sic] Russians to get the SAT-111 system approved, which will be very good for sales if we do it right. I have an important meeting on Thursday to sort this out." This was not then correct as he was not working with Russians, albeit that he was liaising with Scandinavian Avionics about a possible entry into the Russian market. He did however meet Mr Sergey Avvakumov (a Russian resident in Latvia) on 24 January 2008; Mr Avvakumov was understood by Mr Karlsen to be an employee or agent of Scandinavian Avionics and Mr Avvakumov never disabused him of that understanding; although he was simply introduced to Mr Karlsen by Scandinavian Avionics, he was working for his own firm, Navigator.
The 24 January 2008 meeting was in Denmark and Mr Karlsen flew over for the day to meet with Scandinavian Avionics to discuss and demonstrate the SAT-111. He met with Mr Truelsen and Mr Redak. During the day he was introduced to Mr Avvakumov, who he understood worked with Scandinavian Avionics and represented them in Russia and the CIS. He told Mr Karlsen that he had been very successful in selling Aero-C systems into Russia and also had high level contacts within the Russian Airworthiness Authorities such that he was well positioned to get the SAT-111 into Russia on the same basis that Aero-C had been accepted years earlier. During the meeting Mr Karlsen demonstrated the SAT-111 system and overall Scandinavian Avionics indicated that they were very impressed with the size and technology. The price of the SAT-111 unit, which was slightly below that of Aero-C, was also acceptable. Mr Avvakumov felt that there was a significant market opportunity in Russia and advised ADS during the discussions that he could move a significant number of units a year into Russia as the SAT-111 would be installed as optional approved equipment and would get Supplementary Type Certificates ("STCs") to support the SAT-111 as a customer option. Having an STC would also mean that the system had the approval or manufacturer endorsement to install the system on existing aircraft as a retrofit.
I have formed the view that between 24 January 2008 and mid-April 2008 there was little or no contact between Mr Avvakumov and ADS. Mr Karlsen was unconvincing about this; there was little or no mention in his extensive witness statement about such discussions, his oral evidence that he had numerous conversations by way of "Skype" came out of the blue and was not obviously corroborated by any documentation such as e-mails and Mr Avvakumov's e-mail to him in mid April 2008 suggests if anything that there had been no contact since January. There were Skype discussions after April referred to in emails.
Mr Karlsen met with Mr Chisholm on 1 February 2008 during which there was clearly a discussion in relation to stock levels. Mr Karlsen's note records "90 units – sell do not worry about supplies". In his statement (at Paragraph 118) Mr Karlsen suggested that this meeting was urgent and necessary to discuss ADS's "...developing requirement for several hundred units per annum". However, it is doubtful whether even Mr Avvakumov was suggesting at this stage that many hundreds of units would be sold, annually or otherwise. Mr Karlsen sought to suggest in evidence that this estimate followed his meeting in Denmark with Scandinavian Avionics on 24 January 2008; it is clear that Scandinavian Avionics themselves had only been selling 40 Aero-Cs a year; if hundreds of ADS product sales had been actively or realistically contemplated or discussed, Mr Karlsen would have mentioned it. If hundreds were being talked about, his note that 90 units would be available was inconsistent with that. He also said in his statement that Mr Chisholm "reaffirmed his earlier statement to us that if we ran out of SAT 111s ADS would have a SAT-201-based SAT-111 derivative"; there is no hint of that in the note and the re-surfacing of a possible replacement for the SAT-111 was not raised for some weeks. Again I found Mr Karlsen's evidence on this unconvincing.
Another Satamatics review meeting was held on 7 February 2008 and the minutes record that a "business case [was] required to migrate SAT-111 to a SAT-201i solution". Mr Hatherall said that further SAT-111s could be built as there was a supply of SAT-101-boards set aside. This was consistent with Mr Chisholm's discussion with Mr Karlsen a few days before.
There was an internal exchange of e-mails within Satamatics on 28 February 2008. A Mr Callender wrote:
That was passed to Mr Hilton who e-mailed Mr Hatherall and Mr Carlton saying:
Counsel for ADS repeatedly described what was going on at this stage and over the next 3 to 4 months as a "crisis" but in my judgment too much importance has been attached to the use of this word in one e-mail. There was undoubtedly a perceived problem within Satamatics which was that the SAT-101-boards required both for land and marine applications as well as the aeronautical ones were ceasing to be manufactured. Stores had to be maintained for these different applications, in particular for technical support for current owners of SAT-101s who might require a new board, say because units were damaged or needed repair and also for the manufacture of new SAT-111s for ADS if and to the extent that new orders came in. I do not consider that there was a crisis as such but there were conflicting interests within Satamatics. Mr Hatherall said in evidence (which I accept) that in reality the boards were not ring fenced as such.
In this context on 10 March 2008 Mr Lumsden of Satamatics produced a "SAT-111 Production Status Review" which made the point that Satamatics had one SAT-111 left in stock and that the prospect seemed to be of small orders of one or two at a time in the future. Mr Hilton had spoken to Mr Karlsen who had confirmed this and Mr Hilton's reaction had been that Satamatics would not be "that interested in orders of less than 10 units" because the manufacturing costs for smaller numbers were disproportionately higher. He confirmed in this review (also confirmed in an e-mail from Mr Hilton) on that date that at that stage all the SAT-101-boards had been "earmarked to support" the land based product maintenance requirement. If however ADS "put in an order for 30 units tomorrow then we could satisfy that order". Mr Hatherall considered that at this level Satamatics would definitely find a way of fulfilling an order for 30 as it would mean over a £100,000 profit for the company. Satamatics actually had about 80 (or possibly more) boards in stock. Mr Lumsden recognised that a quantity of the SAT-101-boards would need to be assigned back for the SAT-111. However there was a very real concern within Satamatics, based on sales to date, that there needed to be "a strong business case for holding some of these boards for future builds of the SAT-111s" (see Mr Hilton's e-mail of 10 March 2008 timed 12.15). The review document did raise the question as to whether there was "sufficient opportunity to create a SAT-201 variant of the aero product?" with the answer being that it would not be technically difficult but that the regulatory approval was very expensive at about £18,000.
Towards the end of March 2008, a new character came onto the scene on the Satamatics side, a Mr Des Bull who was the senior sales manager and who was to become involved in dealings with ADS. It is from about this time that the main issues with which this case is concerned began to arise, albeit in the context of what had gone on before. On 25 March 2008 ADS raised the question:
The following day, Mr Bull, the newly appointed account manager for ADS, responded:
Mr Bull replied later in the day in these terms:
Based on the evidence which I have heard, I do not understand how Mr Bull could have written this e-mail unless he was misinformed or he was deliberately seeking to mislead ADS. There is no doubt, and I accept the evidence, that there were some 80 boards at least on the premises, albeit administratively they had been allocated to support for the land and marine applications. However it was clear that Messrs Chisholm, Hatherall and Hilton would (if asked) have said that SAT-101-boards could be made available for the manufacture of SAT-111s. It is clear however that no decision had been made to proceed with any new device.
ADS' reaction was one of concern because it thought that Satamatics was keeping SAT-101-boards aside for them and it wanted to be in a position to sell SAT-111s. Mr Karlsen e-mailed Satamatics (Messrs Hatherall and Chisholm) on the same day that he had quotations going out for "approximately 30 systems from 3 companies", that he had "quotations for 80 systems with several operators in Africa and Russia", that there were "flight trials pending with Russia and Mexico", that ADS was "negotiating with Taiwan another 150 systems" and that the Nigerian and Malaysian Air Forces were "showing interest". It has to be said that this was a gross exaggeration and there were no such quotations or negotiations.
Mr Chisholm in an internal email the following day to Mr Koutrouki and others was clearly annoyed with what was going on, stating:
On 27 March 2008 Mr Lumsden e-mailed Mr Chisholm to say that "support do still have approximately 90 new [SAT-101s] so some of these could potentially be used for SAT-111, assuming that we agreed to do so". Mr Chisholm e-mailed Mrs Karlsen later that day to say:
Mrs Karlsen's response the following day was as follows:
Mr Chisholm replied later:
There were also discussions by e-mail on that day about lead times for the manufacture and supply of units from the date of order. Mr Lumsden e-mailed Mrs Karlsen to the effect that the lead time was 12 weeks from receipt of order.
The parties agreed to have a meeting on the following Monday, 31 March 2008. It was attended by Mr and Mrs Karlsen, Mr Chisholm, Mr Lumsden, Mr Koutrouki and Mr Hatherall (with the latter two joining the meeting later). No minutes as such were kept of this meeting although Mr Karlsen and Mr Hatherall kept some vestigial notes. It is common ground that a lead time of 12 to 14 weeks was put forward.
The SAT-221 was discussed at the 31 March meeting, that much being clear from both notes. It is clear that Mr Karlsen was told that the lead time for a SAT-111 unit and a SAT-221 prototype would be approximately the same. Mr Karlsen acknowledged that Mr Hatherall's recollection that a prototype SAT-221 was required for a Russian customer was accurate. That recollection is consistent with Mr Karlsen's e-mail of 18 March 2008 referring to a "contact in Russia" who wanted to test a system on a helicopter. It is not established who the contact was albeit that it was not Mr Avvakumov. There was a suggestion that ADS might secure 60 SAT-101-boards at a cost of £200 per unit. Mr Karlsen was not prepared to do this, but it provides support for the fact that SAT-101 boards were available.
Some progress however was made about the way forward. It was agreed that that Satamatics would provide a prototype based on the SAT-201 as an aeronautical satellite device and, although this was called various things thereafter I will refer to it as the SAT-221. However, there was no suggestion or even hint at this meeting that Satamatics would not meet any order for SAT-111s in the meantime. Indeed, Mr Karlsen considered that Satamatics would comply with its obligations so that if SAT-111s were ordered by ADS the orders would be satisfied. It is now rightly common ground that there was no binding or unconditional agreement between the parties that Satamatics would, was or became bound to produce or manufacture SAT-221s. Under cross-examination, Mr Karlsen, frankly, accepted that the idea was "to take the 221 to a state where we had a commercially viable product and then take it on from there"; "if there was a market demand for it…we would discuss it further" and there were discussions and judgments still to be made as to whether each party was prepared to go ahead after the prototype had been produced and assuming that it was satisfactory. Essentially, there was a mutual understanding only that a prototype would be produced and commercial and other decisions on each side would then be taken.
Following this meeting, Satamatics set about the process of producing the prototype for the SAT-221. On 1 April 2008, Mr Hatherall produced, internally, for Mr Lumsden an approximate costing for the SAT-221 of €400 together with non-recoverable expenditure of €24,000; this assumed that ADS would take responsibility for and financing of the new DO-160D testing which would be required. Mr Lumsden replied saying that he had asked ADS for a sales forecast which would "form the basis of the business plan to move to [SAT-221]". He told ADS by e-mail:
Mr Hatherall produced an internal programme and costings for the production of the prototype (£13,020 and 62 days from 7 April to 1 July 2008), the securing of approvals (£3,340 and 60 days from 2 July to 23 September 2008) and the production of 30 units (£18,240 and 61 days from 2 July to 24 September 2008). The design drawings began to be produced. Mr Hatherall started to liaise with a manufacturer for the new enclosure for the SAT-221. It is clear that within Satamatics some people were enthusiastic for one reason or another to go ahead with the SAT-221. Mr Hatherall was enthusiastic from the engineering side and Mr Lumsden was keen to move away from the SAT-101 by reason of the foreseeable shortage of 101-boards; Mr Lumsden wrote an e-mail to Mr Chisholm saying that he was "desperate to move away from the 101, if only to protect our current customer base". Others such as Mr Bull were less keen. On 2 April 2008, Mrs Karlsen produced some estimates of what might be required in relation to SAT-111s (up to about 450). So far as SAT-221s (which ADS was calling the ADS-200) were concerned, she provided an indication of some 500 sales.
By 16 April 2008 Mr Karlsen had indicated that he would finance the necessary aeronautical testing to be carried out on the SAT-221 prototype. Mr Hatherall's e-mail of 16 April 2008 to Mr Bull, explaining that Mr Karlsen was finding it difficult dealing with Mr Bull who he felt did not know the history, identified that Mr Karlsen was "about to quote for 35 of these SAT-221s and needs timescales and costs", that he was "looking for a price from us of $2000 to $2500 - this would provide us with a profit in the region of $1400-$1900 per unit" and that he also had "interest from Russia and is looking for a SAT-221 prototype for them to trial".
On that day, Mr Avvakumov had contacted Mr Karlsen by e-mail saying
"Glonass" was the Russian satellite system. Mr Karlsen's response was:
Later in the day, Mr Karlsen sent to Mr Avvakumov the earlier ADS-200 flyer which he had prepared.
This and other exchanges reveal clearly that Mr Karlsen was not only enthusiastic about the SAT-221 project but was proceeding virtually on the basis, which was not actually correct (which he must have known), that as between ADS and Satamatics there was a done deal.
There were various communications between ADS and Satamatics about the involvement of Mr Bull who Satamatics was putting forward as ADS' "account manager". Mr and Mrs Karlsen had little confidence in him and the clear impression is that there was a mutual dislike between them and Mr Bull. Various e-mails on 25 and 28 April 2008 confirmed this, typically one on the evening of 25 April from Mr Bull:
The relationship did not improve.
A meeting was held on 30 April 2008 attended by Mr and Mrs Karlsen and Messrs Hatherall and Hilton to review technical aspects of the "next aeronautical satcom system". The background was recorded in minutes prepared by Mr or Mrs Karlsen:
There was discussion about the ability within the proposed SAT-221 to accommodate the Russian Glonass arrangement. Mr Karlsen reported that he saw the "Russian market as being significant" and that ADS had "teamed up with Scandinavian Avionics and Sergey [Avvakumov]" who had "extensive experience in the Russian market and a network that would help commercialise SAT-221…and get it through all the technical acceptance procedures". Mr Karlsen reported that he had "obtained agreement to test the SAT-221…prototype on a Russian Helicopter". A programme to enable this was to involve the prototype being supplied in the first week in June 2008. Lead times were discussed and it was decided that a target maximum production time of eight weeks would be acceptable although an ideal time was four weeks after receipt of order.
Mr and Mrs Karlsen discovered on that day that Mr Chisholm and Satamatics had parted company, albeit on agreed terms. They texted each other on the same day:
Mr and Mrs Karlsen had thus lost one of their key supporters within Satamatics.
There is no doubt that Satamatics was in some financial difficulty. It had been making significant losses for years and Mr Koutrouki as the Managing Director was being required to prepare the company for sale.
Mr Karlsen's enthusiasm for the SAT-221 project did not diminish. He continued liaising with Mr Avvakumov in May 2008. For instance an e-mail exchange on 13 May was as follows:
Mr Avvakumov responded later on the same day:
On 14 May Mr Karlsen phoned Mr Hilton about getting the SAT-221 sooner than planned. Oliver emailed him later stating that it would not be possible to get a unit sooner than agreed in April (12 weeks). He had mentioned that in total ADS required three units (one for a customer and two for testing) but Mr Hilton told him by e-mail that, if he required an additional two, the parties would have to come to agreement on price as all that had been agreed was that Satamatics would provide ADS with one prototype.
A commercial meeting had been arranged between the Karlsens, Mr Koutrouki and Mr Bull for 20 May 2008 but it had to be cancelled because Mr Bull was unavailable in consequence of which Mrs Karlsen e-mailed him on 16 May 2008 saying:
Mr Bull came back saying that he could not manage an earlier date than 5 June 2008.
Shortly after this, a South American contact contacted ADS a the possibility of aeronautical devices for a client in Peru. Mrs Karlsen replied on 20 May 2008 (copied to Mr McQueen of Satamatics):
Mr Hilton of Satamatics saw the specification sheet and e-mailed Mr Karlsen saying that the SAT-221 would be slightly wider than the sheet suggested.
On 20 May 2008 Mr Karlsen e-mailed Mr Hilton a long email summarising the SAT-221 project and the requirement for Russia. The email states:
Mr Hatherall replied:
He wrote internally to Mr Bull at the same time:
Mr Bull e-mailed Messrs Hatherall and Hilton on 20 May 2008 as follows:
At some stage on that day, Mr Bull and Mrs Karlsen spoke on the telephone and this prompted the following e-mail exchange:
Mr Karlsen had been in touch with Mr Avvakumov and emailed Mr Hatherall (cc Mr Bull) on 28 May:
Mr Bull indicated on the same day that he was working on a pricing plan as indicated but he could not provide a price before the meeting on 5 June 2008. Mrs Karlsen pressed him for a price but this came to nothing. E-mails about this carried on but got nowhere. Internally on 30 May 2008 Mr Bull provided to Mr Koutrouki and Mr McQueen figures about the SAT-111 sales (17 producing a gross profit of £23,820) and the SAT-221 current development. With regard to the latter, having listed various costs, he stated:
Mr Bull had also been doing some Companies House research on ADS which he recorded in an e-mail to Mr Koutrouki also on 30 May 2008 which suggested ungallantly that Mr and Mrs Karlsen appeared "to have been involved in more companies than Del Boy Trotter" (a reference to an ageing wide-boy in a television series "Only Fools and Horses"). He provided some detail about this and concluded:
Mr Koutrouki's response was that looking "at these numbers you would normally ask for an upfront commitment as they may not be around for not [sic] much longer".
For the meeting fixed for 5 June 2008, Mr Bull proposed an agenda: ADS current company standing, ADS future sales and 12 month forecast, SAT-221 price and the minimum order quantities and a revised airtime tariffs and terms. Mrs Karlsen believed that Satamatics' current company standing should be discussed as well. They could not agree on an agenda but Mrs Karlsen sent an agenda which included: the Role of Mr Bull, ADS-200, Sales, Risk, Russia, Conclusions and Actions.
The 5 June 2008 meeting was the first occasion when Mr Bull met the Karlsens. Minutes were prepared by Mr Bull albeit that certain amendments were suggested by the Karlsens. The attendees were the Karlsens and Messrs Koutrouki, McQueen and Bull. Since it is material to the issues between the parties, I will set out the relevant parts of the minutes, only one phrase of which was not agreed (identified in square brackets in Paragraph 5):
It does not seem that this meeting was acrimonious as such but it is clear that no final agreement or commitment was made by either side to the SAT-221 project. There is no dispute that it was agreed at the meeting that ADS would at some stage submit an order for a minimum of 10 SAT-221s and that the order would or could be after the prototype had been successfully tested in Russia. After Mr Bull sent the draft minutes on 6 June 2008, Mr Karlsen returned "corrected" minutes on 9 June 2008 which included the qualification that the order would follow "when [The Russians] place an order". Mr Bull challenged this amendment a few hours later saying that Satamatics would require the initial order "on completion of the acceptance trial". Mrs Karlsen's reply was:
In reality, this was where and when the relationship began finally to unravel. Mr Bull e-mailed back on 10 June 2008 saying:
Mrs Karlsen's response shortly thereafter was:
Mr Bull replied on the same day:
The matter rested there for several days. On 11 June 2008, Mr Karlsen had a technical discussion with Mr Hatherall in relation to the prototype and the need for Satamatics to secure Immarsat Type approval. He said that the "unit intended for the trial in Russia is a prototype unit and may change in the final production version". He called for an additional two casings. Mr Hatherall replied that commercial issues had to be settled first but that his team had started producing the installation manual.
Mr Bull got to hear about this because he e-mailed ADS on 13 June in the following terms:
Mrs Karlsen responded:
Mr Bull responded on the same day:
By 13 June 2008, Messrs Hatherall and Hilton had produced the first issue of the "SAT-221 Preliminary Declaration of Design and Performance". This broadly described the SAT-221 in design terms. On the same day, this was sent to Mr Karlsen along with SAT-221 installation instructions. This latter document was necessary for the installation of the prototype.
There was also some e-mail discussion on 13 June 2008 about the possibility of manufacturing a new SAT-101-board with Mr Hatherall saying to Mr Karlsen that he had understood that "ADS' decision was to not commit to SAT-111s but to look forward to the SAT-221". He went on to say that he was not sure if Satamatics had any SAT-101s left in stock but he would check; he said that the SAT-101 could no longer be manufactured "due to obsolete components and the fact that it does not comply with RoHS".
There was another exchange of e-mails on 18 June 2008:
(b) Mr Hatherall's reply:
(c) Mr Bull's replies
Mr Hatherall continued to have some contact on technical matters with Mr Karlsen but Mr Bull reiterated the first paragraph of his 18 June e-mail on 19 June 2008. Meanwhile Mr Karlsen was in touch with Mr Avvakumov with the former agreeing to put together a requisite installation manual and provide other technical information. On the 27 June Mr Hatherall emailed Mr Karlsen stating that the SAT-221 unit was now activated on Satamatics' gateway and that it used ISAT M2M (D2). He wanted Mr Karlsen to check that it worked; Mr Karlsen checked the web application and it had been working. This was in the context that the prototype unit was due to complete testing on 30 June 2008.
On 27 June Mr Avvakumov emailed Mr Karlsen with a request that he had received from MIL Design Bureau and the Russian Aeronavigation Institute raising questions about the ADS-200 Installation Manual. Following this, Mr Karlsen on 30 June emailed all the ADS-200 documentation (now received from Satamatics) to Mr Avvakumov, including the documentation for a converter, which he had procured separately (not from Satamatics). On 1 July 2008 Mr Avvakumov confirmed that his Russian customers used 3-minute reporting intervals for helicopters (with Aero-C). For the SAT-221, 3minute intervals for normal routine operations and 2 minute intervals for distress reporting were to be used.
On 14 July 2008, after Mr Hilton of ADS verified that the SAT-221 worked with a particular converter, Satamatics dispatched the prototype and the converter. On the same day, Mr Bull emailed ADS:
On the following day Mr Hatherall emailed Mr Karlsen the 19-page "SAT-221 Prototype Definition and Acceptance" tests, stating:
Following some emails to and from Mr Avvakumov, Mr Karlsen sent a letter dated 21 July 2008 to Mr Koutrouki, which having addressed the history from February 2008 went on:
On 30 July 2008, Dino Koutrouki responded by letter stating that:
From this moment on, no further orders were submitted. The prototype was not used and indeed was not even turned on. Solicitors' letters were exchanged in September 2008. ADS's solicitors letter of 10 September 2008 asserted that the SAT-101-boards were no longer in production and that Satamatics had previously advised ADS that it had little or no stock; this followed a letter from Satamatics' solicitor indicating that it could "meet its obligations under the agreement…to supply such quantities of the SAT-111 as required by [ADS] until the [12 months'] notice has expired". ADS' solicitors suggested that the refusal to supply SAT-221s would lead to a loss of £2.7 million in profits over the next 3 to 5 years. However they called upon Satamatics to accept its "legal responsibilities" and indicated that proceedings would be issued if there was no constructive response. The response came by way of a holding response on 12 September 2008.
By mid-September 2008, Mr Karlsen was telling Mr Avvakumov that "Satamatics will not let us have the" SAT-221. Mr Avvakumov had estimated at that time that the market in Russia for a tracking system with the Glonass option was 500 to 700 units over 3 to 5 years.
On 24 September 2008 Mr Karlsen wrote to Mr Koutrouki seeking to persuade him to change his mind and proposed terms in relation to the furtherance of the SAT-221 project. That evoked no or no constructive response.
There had been some discussion about a possible order for two SAT-111s in late November or early December 2008. On 5 December 2008 Mrs Karlsen e-mailed Mr Bull in the following terms:
There is no evidence that there actually was a customer as such and I have formed the view that Mrs Karlsen (unknown to Satamatics) was probably "trying it on" to see what the reaction would be.
Internally, Mr Bull said to Mr Lumsden by email on the same date;
He replied to Mrs Karlsen on 8 December:
Mrs Karlsen tried again on 19 December 2008, emailing Mr Bull;
Mr Bull replied:
It is clear that at all times from early 2008 onwards Satamatics had enough SAT-101-boards to satisfy any order for SAT-111s which ADS might realistically have submitted. For instance by 8 September 2008, as recorded at a weekly meeting, some 100 boards were available. Indeed by the time of the trial, some 27 were still available and unused. Between 2008 and 2012 Satamatics continued to supply airtime to ADS in respect of the units which were sold and ADS has continued to pay for such air time for onward sale to its existing customers. In addition in June 2009 Satamatics provided technical support by way of response to a request for repair of a SAT-111 unit in June 2009.
Little of relevance to these proceedings happened until the proceedings were actually issued.
The Proceedings
ADS issued its claim on 12 August 2011. The pleadings are (unusually but properly) succinct. The Amended Particulars of Claim identifies the Agreement and pleads at Paragraph 6 that the parties "developed a derivative of the SAT-111 product called the SAT-221 product …" Paragraph 7 pleads that in breach of Clause 3.2 of the Agreement "the Defendant ceased manufacture of the SAT-111 product (including derivatives thereof) without giving 12 months notice to the Claimant". The details recite the history in 23 sub-paragraphs between 1 February and 30 July 2008. Paragraph 7A (only pleaded by way of an amendment on 12 June 2012) pleaded that by reason of the matters pleaded in Paragraph 7 and referred to in Paragraph 28 of the Amended Reply "the Defendant repudiated the Agreement, which the Claimant accepted by conduct in or around December 2008." The acceptance by ADS of the repudiation is said to have arisen in the circumstances set out in Paragraphs 7A to 7E, which include the contents of its and its solicitors letters of 21 July and 10 and 24 September 2008 referred to above. Primarily the acceptance is said to have arisen because ADS placed no further orders, did not test or operate a prototype and had no further contact with the Defendant after 2008. Damages are pleaded as being a loss of profit on sales of product (US$15,180,000), lost profit on airtime (US$1,656,000) and general damages (unquantified in the pleadings) for loss of goodwill. The large claim was based on the loss of 1380 sales including 700 in the Russian Market, 350 in Taiwan, 113 to the Malaysian Airforce and varying smaller numbers to other countries around the world.
The Amended Defence denies that there was any breach as alleged and that EMS ceased to manufacture before the expiry of the 12-month notice period given by EMS in its letter dated 30 July 2008 to ADS. The Defendant denies that the SAT-221 was or became a derivative of the SAT-111 within the definition of "Products" in the Agreement. The Claimant's quantum is positively challenged and there is reliance on the exclusion or limitation clauses in the Agreement. It is denied that there was any repudiation or any acceptance.
The Amended Reply takes issue with many parts of the Amended Defence. Paragraphs 6 to 9 plead as follows:
No particular pleading points have been taken by either party even though there has been some development of what was pleaded by the Claimant. The Claimant now asserts estoppel by convention, representation and election (promissory estoppel) as well as putting forward, now exclusively, its damages claim on a loss of opportunity basis.
Issues and Discussion
The liability issues raised by the pleadings are, generically, as follows:
In my judgment, having reviewed all the evidence, I find that Satamatics had not as such ceased to manufacture the SAT-111. My reasons are as follows:
In my judgment, the SAT-221 was not, and to the extent that it was developed by July 2008 had not become, a "derivative" within the meaning of the definition of "Product" in the Agreement and Satamatics never became obliged to manufacture and supply the SAT-221 at any stage. There was no obligation as such under the Agreement on Satamatics to produce the SAT-221; it undertook to supply under Clause 3.1 the SAT-111 Products. It was not, forcefully if at all, argued that there was a continuing obligation on the part of Satamatics in effect to develop derivatives and it is not possible to imply or infer such an obligation.
The reality is that, although there had been some limited talk in 2006 of developing something different from the SAT-111 or a new generation of aeronautical tracking devices, that had not been mutually pursued by either ADS or Satamatics in 2006 and 2007. It was only in the early part of 2008 when Mr Karlsen heard about the impending closure of the Aero-C and had met Mr Avvakumov and Scandinavian Avionics that he spoke to Mr Chisholm; that was about SAT-111s and the possible market in Russia. Again, as both before and after, he was enthusiastically optimistic about the possibilities and wanted to know the extent to which Satamatics could cater for the number of sales which he was anticipating (hundreds). The idea about what came to be called the SAT-221 first materially surfaced in late March 2008 after the row about the SAT-101-boards and whether Satamatics should or would set aside such boards against a commitment charge for so doing. ADS was unwilling to do that, which was obviously a choice which they were entitled to make. It was at that stage that Mr Chisholm floated the idea about the use of the SAT-201 and what was to be talked about thereafter as the SAT-221.
Thus it was that the parties came to discuss in detail the SAT-221 at the meeting of 31 March 2008. There was in effect some "give and take" (albeit not in any binding sense) between the parties at that meeting. Satamatics said it would produce the SAT-221 prototype but both parties effectively reserved their position as to whether the SAT-221 project went ahead with both parties able to form a view in the future as to whether from each of their standpoints the project was viable. It was at most an informal "subject to contract" arrangement albeit that it had not even in truth got to that stage.
There certainly was no variation of the Agreement or waiver or abandonment of the provision (Clause 13.4) that any modification to the Agreement had to be by way of a written instrument signed by both parties. There was no threat or statement that in the meantime Satamatics would not produce any SAT-111s ordered in the interim.
Leaving aside estoppel issues, what happened in fact over the following 2 to 3 months is that, as decided at the 31 March meeting, the prototype was developed and from ADS's side it decided and proceeded on the basis that the sensible and commercial way forward was to promote the SAT-221 to customers, albeit that the greater part of the activity was through Mr Avvakumov. There is no doubt that Mr and Mrs Karlsen anticipated or at least very much hoped that the SAT-221 would go ahead but that was in the context that, other than the production of the prototype, there was no obligation on the part of Satamatics to go ahead with the project, no matter how technically viable it was. They were so convinced however that it was a good idea that it was they who assumed that it was bound to go ahead.
When one therefore comes to analyse the events which led to the worsening in relations between the parties in May and June 2008, it was the insistence from Satamatics (from Mr Bull and Mr Koutrouki) that ADS had to place an order for 10 units in effect before ADS had received an order itself from the Russian clients that led to that state of affairs. As there was no binding contractual commitment on the part of Satamatics to produce a SAT-221 as a Product under the Agreement, all that Satamatics was doing on analysis was seeking to secure commercial viability from its standpoint by securing an order which would cover its costs to date; this approach was, in one sense, tough bargaining because they did not have particular confidence in ADS' ability to secure orders (based on previous performance) and it was in some financial difficulties themselves. They felt that, if the SAT-221 market was as good as ADS was suggesting, ADS should and could demonstrate its confidence by placing an order for some £20,000 (which was perceived not to be a large amount).
On the basis that and because there was no binding commitment to produce the SAT-221, it was open to Satamatics to take whatever commercial standpoint it wanted to take. If Mr Karlsen did not consider in effect that it was commercially viable going ahead with the project by placing an order and committing ADS to purchase 10 SAT-221s when they got to the production stage, that was his choice. The fact that he considered that the project was commercially viable otherwise is not to the point. He may have felt that Satamatics was behaving unreasonably but again that is not material.
In my judgment, the SAT-221 project had not got to a stage at which it could be properly described as a Product within the meaning of the Agreement. Whilst it could eventually have become a derivative within that definition, it did not become one by the time that the relationship began to founder in June and July 2008. My reasons are as follows:
It is strictly speaking unnecessary to decide whether the SAT-221 would have become a derivative capable of being produced to a production standard such that it would be a derivative within the meaning of the word "Product" in the Agreement. It is speculative to make such a finding because there were no trials. If I had had to speculate, I would, tentatively, have anticipated that a version of the prototype would or could well have been capable of becoming a derivative and, subject to that provisional view, I would have preferred the evidence of Mr Koll in this regard; his evidence was in a sense general because he did not and could not sensibly speculate as to what would have happened following the trials. The fact that the SAT-221 would have been a derivative more of the SAT-201 rather than directly of the SAT-101 or SAT-111 would not prevent it being a derivative under the Agreement. The fact that it was a simpler and cheaper unit would not prevent it being derivative. There would be sufficient similarities in the functionality of the proposed SAT-221 prototype to suggest that it would have become a derivative via the SAT-201 of the SAT-111. Essentially, the technology was similar and they broadly performed in the same way, albeit that the SAT-221 prototype had less "bells and whistles" than the SAT-221.
It is first necessary to review or summarise the law relating to the relevant types of estoppel relied upon. Although one could be forgiven for believing that ADS was only relying on estoppel by representation in its pleading, in fact it relied upon promissory estoppel and estoppel by convention as well. As no pleading point is made, I will consider these three types now advanced by the Claimant.
In typical and sensible terms (upon which I would not want to improve) Lord Denning MR described estoppel generically in McIlkenny v Chief Constable of the West Midlands 1980 QB 283 at 316-7:
Estoppel by representation is one of Lord Denning's "rooms". An authoritative exposition of the law is to be found in Spencer Bower Estoppel by Representation , 4 th Edition at I.2.2 and I.2.3:
Wilken and Ghaly in the The Law of Waiver, Variation, and Estoppel (3 rd ed) summarise the elements more pithily but no less accurately as:
It is important to appreciate that the representation must be one of fact. Generally, at least, a representation as to future intentions will not suffice nor will a promise to do something in the future (see Roebuck v Mungovin [1994] 1 All ER 568 (HL) and Argy Trading Co Ltd v Lapid Developments Ltd [1977] 1 WLR 444). This is accepted by Counsel for ADS. It is possible, however, that a representation as to future intentions or a promise to do something in the future could give rise an estoppel of a different sort. A representation that in fact a party's current intention is a certain one, however, may be effectively a statement of fact, that fact being what at the current time the intention actually is.
So far as estoppel by convention is concerned, Lord Steyn summarised the law in this regard at Paragraph 57 of his judgement in the House of Lords in Republic of India v India Steamship Co Ltd [1997] UKHL 40 :
Mr Justice Briggs in HMRC v Benchdollar Ltd [2009] EWHC 1310 (Ch) considered this dictum and various others and stated at Paragraph 52:
Finally, the essential elements of promissory estoppel (sometimes known as equitable forbearance) are summarised by Wilken and Ghaly at Paragraphs 8.03 and 8.04:
Equitable forbearance is a defensive doctrine that cannot be used to create new obligations: its ambit is restricted to promises to forgo existing rights and does not extend to promises to create new ones, so that it can be used "as a shield but not a sword". This principle was first articulated in Combe v Combe [1951] 2 KB 215, where the court emphasised that to allow equitable forbearance to create rights would undermine established contract law principles by enabling promises unsupported by consideration to be enforced. It was in this case that Lord Denning explained and perhaps qualified his decision in Central London Property Trust Ltd v High Trees House Ltd, 1947 KB 130, saying that "the principle never stands alone as giving a cause of action in itself" and that "it can never do away with the necessity of consideration when there is an essential part of the cause of action." While it has been said that "swords with a little ingenuity can be beaten into shields" (see Brikom Investments v Seaford [1981] 1 WLR 863) the principle has frequently and more recently been approved (see for instance BP v Aon [2006] EWHC 424 at 268ff).
I do not consider however that any of these forms of estoppel were engaged here. My reasons are as follows:
It follows from the above that ADS' case fails on liability.
I turn therefore briefly to the remaining issues. In relation to repudiation, there was no material breach. Even if it could be said that that there was some anticipatory breach of contract in relation to indications that SAT-111s would or could not be produced, that was recovered (so to speak) by the formal notice of the cessation of manufacture on 30 July 2008 which made it clear that that all orders for SAT-111s would be met and that sufficient SAT-101-boards were being set aside to satisfy any orders which might realistically be submitted. There were in fact sufficient boards; unfortunately, there were no orders. In those circumstances there would only have been (if any breach at all) a breach up to the end of July 2008. Even if that was repudiatory, the repudiation was (even on ADS's case) not accepted before August 2008.
But so far as any repudiation was concerned, I would have found that the repudiation was not accepted. The plea is that it was accepted in effect by conduct in December 2008. An acceptance of a repudiation must be clear and unequivocal. Unless and until the repudiation is accepted the contract continues in existence since "an unaccepted repudiation is a thing writ in water": Howard v Pickford Tool [1951] 1 KB 417. Mere inactivity or acquiescence will not generally be regarded as acceptance for this purpose: Denmark Productions v Boscobel [1969] 1 QB 699. Acceptance is usually done by communicating the decision to terminate to the party in default, although it may be sufficient to lead evidence of an "unequivocal overt act which is inconsistent with the subsistence of the contract": State Trading Corp of India v M Golodetz Ltd [1989] 2 Lloyds Rep 277: see generally Chitty at 24-013.
There certainly can be no words relied upon. Indeed, it did not apparently cross ADS' mind that it had accepted any repudiation until a late amendment in these proceedings, even though it was advised by solicitors in 2008. One can not infer acceptance from the absence of any new orders for the SAT-111s; there was no obligation on the part of ADS to place orders and the history over the previous 12 months or so did not suggest that there was ever likely to be any significant number of orders in any event. The exchanges between the parties in December 2008, objectively judged, suggested that ADS might still be interested in submitting orders. It continued to pay for airtime under the Agreement going through to 2012 and to seek technical support in 2009 for a damaged unit which, again objectively judged, indicated that ADS still considered that the Agreement was subsisting.
If I had to deal with damages, I would have very substantially reduced the damages. It is difficult to speculate in any detail about what damages I would have awarded in the light of the findings about there being a breach. I was not impressed with the evidence of Mr Avvakumov although I hasten to say that I do not consider that he was being consciously dishonest. What was very surprising was that there was not one document as between him and the people with whom he was dealing in Russia from whom millions of pounds' worth of orders would supposedly have been secured; he was apparently not even asked to produce any. The absence of any corroboration undermines the reliability of that evidence. I also consider it extremely surprising that Mr Avvakumov never disclosed to Mr Karlsen that he was actually working for himself through a firm called Navigator rather than Scandinavian Avionics; that is odd to say the least. I also found that it was unfortunate that a key element of his evidence only emerged in the witness box, which was that there was a realistic possibility that the Russian legislature or an appropriate agency might impose mandatory requirements for certain aircraft to have satellite tracking devices as standard. Finally, the e-mail traffic between him and Mr Karlsen only identified substantial possible sale figures once the parties were in dispute in September 2008.
Apart from the estimate of Russian sales, the remaining possible sales were supported by vestigial evidence, for instance of the possible sale of 350 units to Taiwan. This was based on some e-mail traffic between a lady called Jasmine Chan of an agency in Taiwan which suggested the possibility of sales to the Taiwanese military; she seems to take some months off in the middle of this e-mail exchange for one reason or another and does not seem to have had any or much influence at the Taiwanese end. Another factor which would have influenced me was the fact that in 2008 and much closer to the time that the parties were in dispute, ADS' estimates of loss were very much less than they are now.
If I had had to decide what damages to award as a result of a repudiatory breach involving failure to supply SAT-111s and SAT-221s, I would have allowed no more than 100 lost sales and at a much lower profit level than that relied upon. I preferred the evidence of the Defendant's expert that the profit would have been much lower than the $11,000 per unit; there would have been discounts to secure sales (as there were for the SAT-111 sales), there would have been agency fees (which were not allowed for in the Claimant's calculations), there would have been additional expenses of marketing (again not allowed for) and, arguably more importantly, the sale price would have been significantly less than the price suggested by the Claimant and its expert. There had historically been a problem with selling SAT-111s at the prices put forward by ADS and there is no real reason to think that the Claimants would have been able to secure even 100 sales unless they reduced their price to deal with both legitimate competition and the sort of "box shifter" competition which they had faced in selling the SAT-111. I would have allowed in the region of US$ 4,000 per unit.
Decision
The Claimant's claim is dismissed and there will be judgment for the Defendant.