OUTER HOUSE, COURT OF SESSION [2010] CSOH 148
CA31/07	OPINION OF LORD DRUMMOND YOUNG in the cause TULLIS RUSSELL PAPERMAKERS LIMITED Pursuer; against INVERESK LIMITED Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Dean of Faculty; Delibegovic-Broome; Dundas & Wilson, CS, LLP

Defender: Currie, QC; Lake, QC; McGrigors, LLP

10 November 2010

[1] Prior to June 2005 both parties were involved in the business of the manufacture and sale of paper products, including board. The pursuers manufactured board under the name "Trucard" and the defenders manufactured broadly similar qualities of board under the name "Gemini". Both Trucard and Gemini were coated solid bleached sulphate ("SBS") boards. The smooth coating on such board made it suitable for high-quality printing, and the typical uses of both boards were in the manufacture of greetings cards, catalogues, packaging for high-quality products such as cosmetics and pharmaceuticals, and certain types of label. On 9 June 2005 the parties entered into a transaction whereby the pursuers agreed to acquire the Gemini brand and its goodwill from the defenders, together with customer information related to the brand and certain related assets, and the defenders agreed that during the period of five months from 9 June to 8 November 2005 (referred to as the "Services Period") they would manufacture and distribute Gemini board under licence from the pursuers. The transaction was recorded in two separate agreements, the Asset Purchase Agreement, also known as the Acquisition Agreement, which dealt with the acquisition of the Gemini brand, customer information and other assets by the pursuers, and the Services Agreement, which dealt with the services that were to be provided by the defenders during the Services Period, notably the manufacture and distribution of Gemini board. Prior to the date of proof, the pursuers had paid the defenders £5 million under the Acquisition Agreement and sums totalling £8 million under the Services Agreement.

[2] During the Services Period and the period immediately thereafter, it became apparent that the Gemini board manufactured by the defenders and supplied to their customers contained an unusually large number of defects. Board and other paper products inevitably contain some defective material (see paragraphs [19] and [20] below) but the number of defects found in the board manufactured during the Services Period was much greater than normal. The pursuers also became concerned that in dealing with the complaints of customers supplied with defective board the defenders adopted an antagonistic attitude; they thought that the defenders' behaviour was liable to alienate Gemini customers. Following the end of the Services Period, the pursuers discovered that their sales of Gemini paper to former customers of the defenders were substantially lower than they had expected. They attributed this to the quantity of defective board manufactured by the defenders during the Services Period and the hostile attitude of the defenders to customer complaints. In due course they raised the present action against the pursuers, in which they conclude for payment of a total of £5,358,032 90. The largest component in that claim is a conclusion for £4,800,689 by way of damages for breach of contract. The remaining parts of the pursuers' claim relate to payments that are said to be due under provisions of the parties' contracts and, as in alternative to one of these, a further element of damages. The defenders have lodged a counterclaim for £680,685 by way of damages for breach of contract, but in the event that sum was reduced to £4,640.80 in respect of the alleged failure by the pursuers to allow the defenders' accountants access to books and records on two occasions.

[3] A further action has been raised by the present defenders against the present pursuers in which they claim payment of £909,395 as additional consideration under the Asset Purchase Agreement. That agreement provided for the payment of such consideration in the event that sales of Gemini board by the pursuers exceeded certain levels. The defenders' action has been the subject of sundry procedure, including a decision of the Supreme Court given on 5 May 2010, during the course of the proof in the pursuers' action. The result of the Supreme Court's decision is that, in respect of the defenders' claim for additional consideration, the pursuers are entitled to withhold payment pending the outcome of their claim for damages in the present action.

[4] After sundry procedure the present action was appointed to proof before answer, and this opinion is issued following that proof. It proceeds as follows:

i. The witnesses led and a brief summary of their evidence.

ii. The nature of the parties' products and the paper and board industry.

iii. The reasons for the transaction: its underlying commercial purposes.

iv. The steps leading to the transaction.

v. The detailed provisions of the parties' contracts, the Acquisition Agreement and the Services Agreement.

vi. An analysis of the breaches of contract alleged by the pursuers.

vii. The pursuers' claim as a global claim.

viii. The evidence relating to the first breach of contract alleged by the pursuers, the supply during the Services Period of excessive quantities of defective board.

ix. The evidence relating to the second breach of contract alleged by the pursuers, the manner in which the defenders dealt with customer complaints immediately after the Services Period.

x. The extent to which the pursuers suffered loss through breach of contract.

xi. The quantification of such loss.

xii. The subsidiary conclusions.

xiii. The counterclaim.

xiv. The defenders' plea of retention.

Witnesses

[5] All of the witnesses of fact were led by the pursuers; the directors of the defenders who were primarily involved in the transaction, Mr Alan Walker, their Chief Executive Officer, and Mr Gordon Thomson, their Finance Director, did not give evidence. The defenders also lodged two statements from Dr George Kellie, who appears to have some expertise in the paper industry, but he did not give evidence. In view of the failure by the defenders to lead any witnesses of fact I was invited by counsel for the pursuers to draw the most favourable inferences that the pursuers' evidence was capable of yielding. In support of that proposition reference was made to a number of well-known authorities: Ross v Associated Portland Cement Manufacturers Ltd, [1964] 1 WLR 768, per Lord Reid at 775; O'Donnell v Murdoch McKenzie & Co, 1967 SC (HL) 63, per Lord Upjohn at 71 and Lord Wilberforce at 73; and Davidson v Duncan, 1981 SC 83, per LJC Wheatley at 89. In O'Donnell, for example, Lord Upjohn stated:

"The defenders called no evidence, and in such cases, as was established in your Lordships' House in Ross v Associated Portland Cement Manufacturers, ..., only the most favourable inferences should be drawn from the pursuer's evidence".

For the defenders it was pointed out that that in Ross Lord Reid had merely pointed out that the most favourable inferences may be drawn from a party's evidence in such circumstances, and it was submitted that I should follow that formulation of the rule rather than the more extreme formulation by Lord Upjohn cited above; reference was made to AMN Group Ltd v Gilcomston North Ltd, 2008 SLT 835. I accept that there might be cases where the most favourable inferences should not be drawn in such a situation, but that would in my opinion be exceptional; the normal rule is that stated by Lord Upjohn in O'Donnell, and special circumstances would be required to justify a departure from that rule. In the present case I formed a favourable view of the pursuers' witnesses, and I accordingly consider that the normal rule should apply.

[6] The witnesses of fact fell into three categories. The first of these consisted of employees of the pursuers who were involved in the transaction and in subsequent events; the second consisted of employees of the defenders who were involved in the management of the defenders' Carrongrove mill during the Services Period; and the third consisted of employees of five of the defenders' customers. Witness statements were lodged on behalf of each of those witnesses, but they all gave evidence and all adopted their statements and were, of course, subject to cross examination. I found all of those witnesses to be both reliable and credible, and I have no hesitation in accepting their evidence on all material issues of fact. Nor have I any hesitation in drawing the most favourable inferences that can reasonably be taken from their evidence.

[7] The evidence relating to the negotiation of the transaction was given by three of the pursuers' witnesses, Mr Chris Parr, who was at the time their Managing Director and is now their Group Chief Executive Officer, Mr Malcolm Sinclair, who was their Export Sales and Marketing Director, and Mr Gary Wallace, who was their Commercial Director. Both Mr Parr and Mr Wallace are members of the Institute of Chartered Accountants of Scotland. Mr Parr spoke to the conclusion of the transaction and its underlying rationale, and to the due diligence exercise that was carried out before the transaction was concluded. He also gave evidence of events during the Services Period and the following few months. Mr Sinclair's evidence covered broadly the same topics, but with a greater emphasis on relations with customers. He dealt in particular with the extent to which the pursuers were able to take over the defenders' Gemini customers and the effect that the conduct of the defenders had on relations with Gemini customers. Mr Wallace explained the calculations that the pursuers had performed to justify the acquisition of the Gemini brand and customer base (12 November, 11.51 onwards). I found his evidence on this matter to be very clear, and I accept that his calculations were properly performed. On the basis of the evidence of Mr Parr, Mr Sinclair and Mr Wallace, I consider that the pursuers had reasonable and realistic expectations of the transaction, in particular that the cost of acquisition of the Gemini brand would be recovered over a period of four years. Mr Wallace also spoke to the financial information that was provided to the pursuers' experts, Oxera. It was clear that the financial information made available to Oxera was very extensive, and I am satisfied that it was properly prepared and could safely be relied upon.

[8] Mr Parr and Mr Sinclair also gave evidence about the level of complaints received following the Services Period and the defenders' relationship with Gemini customers in dealing with those complaints. Their evidence was supported by extensive documentary evidence, and also by the evidence of representatives of Gemini customers and employees of the defenders. It is on the basis of the totality of that evidence that I am satisfied that the quantity of complaints experienced as a result of Gemini production by the defenders during the Services Period greatly exceeded the level of complaints that had previously been the norm. I am also satisfied, on the basis of the same evidence, that the defenders' treatment of customers in consequence of those complaints was antagonistic and hostile, and was liable to discourage further Gemini sales.

[9] Evidence was also led from Mr Gregor Milne, the pursuers' Coated Product Manager, and Mr John Dougan, their Technical Services Manager. Mr Milne dealt with the technical aspects of paper production, including the difference between the Gemini paper produced by the defenders and that produced by the pursuers ("New Gemini") and its relationship to Trucard, the board produced by the pursuers prior to the transaction. Mr Milne also gave evidence as to the technical side of the market for SBS board. Mr Dougan was responsible for, among other things, assessing any complaints received from the pursuers' customers in relation to paper or board that they had purchased. He commented in detail, both in his written statement and in his evidence, on the claims made by Gemini customers in relation to board manufactured by the defenders during the Services Period. It is on the basis of his evidence, in particular, that I am satisfied that the complaints made by customers were properly investigated by the pursuers.

[10] The former employees of the defenders who gave evidence were Mr Roland MacLeod, who was the manager of the Carrongrove Mill and subsequently Executive Director of Carrongrove until November 2006, and Mr Ronald Law, who was the Sales and Marketing Manager at Carrongrove in 2005 and 2006. Mr MacLeod gave evidence that, shortly after the end of the Services Period, it became apparent that there had been significant problems with production during that period, in particular delamination. Nevertheless, neither he nor Mr Law had been able to determine how the failures occurred. Mr MacLeod also gave evidence about correspondence between the defenders and customers after the end of the Services Period. For reasons developed in detail below, I am satisfied that the tone of much of that correspondence was wholly inappropriate, and was liable to alienate customers from using the Gemini brand in future. Mr Law gave evidence about problems with production that became apparent towards the end of the Services Period. He accepted that there after there had been a long list of complaints. Mr Law also give evidence about the change in the defenders' attitude towards customers once it had become apparent that there had been a serious delamination problem; at that point, the defenders had been instructed to take a strong position against complaints. Mr Law stated (written statement, paragraph 35):

"From then our response was stronger than normal, and stronger than probably was reasonable".

[11] Representatives of five Gemini customers gave evidence. The first was Christoph Tschoner, who was by the time of the proof a Sales Director at Antalis Austria, the Austrian member of a multinational group of paper merchants. In 2005 and 2006 he occupied a similar position within an Austrian company known as IT Papier, which in due course became part of a larger concern known as MAP Austria which in turn was taken over by the Antalis group. IT Papier and its predecessor had been major paper merchants in Austria and had been a long-standing customer of the defenders. Mr Tschoner gave evidence on the conduct of the defenders during and immediately after the Services Period. In summary, his evidence was that during the last phase of production at Carrongrove the quantity of complaints rose and the handling of complaints deteriorated drastically (written statement, paragraph 7). He gave detailed evidence about a number of those complaints and the defenders' treatment of them; one of these, involving supply to a printer named Dinkhauser, was especially serious. The second witness from a Gemini customer was Mr Mike Slootweg, who was Commercial Manager at ModoVanGelder, one of the leading paper merchants in the Netherlands. In 2005 he was Strategic Purchaser for the same company. In 2005 ModoVanGelder was part of the MAP Group of paper merchants, and it subsequently became part of the Antalis Group. ModoVanGelder had close ties with two other paper merchants in the Benelux area, MAP Belux and Grafisch Papier; the three companies work together as a team for purchasing, marketing and logistics. For many years ModoVanGelder had sold Gemini supplied by the defenders. MAP Belux also sold Gemini, and Grafisch Papier sold a merchant's own label board which was supplied by the defenders using the same board as Gemini. Mr Slootweg gave evidence that ModoVanGelder had had 11 complaints in respect of Carrongrove production during the Services Period, a much higher rate than normal (written statement, paragraph 11). Those complaints had been very badly treated by the defenders. The third representative of a Gemini customer to give evidence was Mr Ludger Hasecker, who was head of procurement at a German paper merchant known as Papier Union GmbH. He described Papier Union as one of the leading paper merchants in Germany, based in Hamburg, with several branches and affiliates. In particular, it was affiliated to a Portuguese merchant known as Inapa IPG, and the two companies controlled a group with operations in France, Belgium, Switzerland, Spain and the UK as well as Germany and Portugal. Papier Union had been a customer of the defenders for many years with, Mr Hasecker said, an excellent relationship prior to June 2005. The board supplied by the defenders was used for Papier Union's merchant's own label product, Duocard. Gemini was supplied to Papier Union's principal competitor in the German market, Schneidersoehne. Mr Hasecker gave evidence that Papier Union had experienced 67 claims of paper manufactured at Carrongrove during the Services Period; this was well above the historical trend of complaints on Duocard (written statement, paragraph 14). At the end of the Services Period they still had stock produced at Carrongrove, and because of the rate of complaints came to the conclusion that they had no option but to quarantine that stock (paragraph 29). A dispute then developed with the defenders as to what should happen to that stock. In addition, Mr Hasecker give evidence of the details of a number of the complaints that had arisen with board produced during the Services Period.

[12] Two representatives of Gemini customers in the United Kingdom gave evidence. Mr Andrew Swain was Technical Manager for GM2 Technical Services Department, a division within an important group of paper merchants known as James McNaughton with interests in the United Kingdom and Ireland. McNaughton are now part of the Antalis Group, having previously been part of the MAP Group. McNaughton had purchased Gemini from the defenders for many years and were, he thought, the main Gemini stockist in the UK in 2005. McNaughton also purchased Trucard from the pursuers on a regular basis. Mr Swain gave evidence that McNaughton experienced 16 customer complaints in relation to board produced during the Services Period, a larger number than usual. He also gave evidence that it became much more difficult to have complaints dealt with by the defenders (written statement, paragraphs 6-7). The second witness from a Gemini customer in the United Kingdom was Mr Adrian Rigg, the Head of Procurement at BemroseBooth Ltd, who operate as security printers (printers of items that require a high level of security) at three sites, in Hull, Thornaby and Derby. The company produces items such as calendars, vouchers, car park tickets, Royal Mail labels, rail tickets and phone cards. BemroseBooth were long-term customers of the defenders, and had been a major purchaser of Gemini for many years. Gemini was used in particular to produce phonecards for customers around the world. BemroseBooth had also purchased Trucard from the pursuers for many years, and regarded the two products as interchangeable for phonecard production. Mr Rigg gave evidence about complaints relating to Gemini produced during the Services Period, including in particular a very significant complaint which affected the production of 5 million phonecards for a customer in Tunisia (written statement, paragraph 6 onwards). He also gave evidence about the difficulty of having complaints dealt with by the defenders during the early part of 2006.

[13] Finally, expert evidence was led from two economists, Dr Maciej Firla-Cuchra, of Oxera Consulting Ltd, and Mr Alan Overd, of CRA International. This dealt with two matters, establishing that the pursuers had suffered loss and the quantification of such loss; in both cases the evidence obviously proceeded on the hypothesis that the defenders had committed breaches of contract causing such loss. Dr Cuchra had produced two reports, the second involving major revisions of the first, in which he attempted to quantify such loss. In doing so he relied in large measure on factual material provided by the pursuers; the latter material was spoken to in particular by Mr Wallace, and also in part by Mr Dougan. Mr Overd also produced two reports. In these he did not attempt to provide any alternative quantification of loss but instead confined himself to detailed criticism of the method and conclusions adopted by Dr Cuchra. Both experts gave oral evidence at some length in which the themes of their reports were taken up in detail. I deal with the expert evidence below at paragraph [159] onwards.

The parties' products and the paper and board industry

[14] In order to understand certain important aspects of the pursuers' claim, it is essential to have certain knowledge about the parties' products and the nature of the paper and board industry and the process of board manufacture. The following account is derived from the evidence of Mr Parr, Mr Sinclair and Mr Dougan; their evidence on these matters was not controversial. Mr Sinclair gave evidence on the marketing of board, which was his particular responsibility, and Mr Dougan on the processes involved in its manufacture; Mr Dougan's particular responsibility was the assessment of complaints made by customers about board. The primary concern is obviously the position of the parties to the action, but in considering the expert evidence, in particular, it is important to understand certain features of the way in which the paper and board industry operates throughout the principal European markets.

Pursuers' and defenders' products
[15] The pursuers sell approximately 150,000 tonnes of paper and board annually. Most of this is board made with twin wire machines. The term "board" is used to describe paper products of heavier weights (above 180 g per square metre). Board is made in a wide variety of qualities, with the larger volumes at the lower quality end. The highest quality board is known as cast coated board. Immediately below this is solid bleached sulphate, or SBS, board. The pulps used to produce SBS board are produced entirely from a chemical process and are accordingly very clean and pure. SBS board may be either coated or uncoated; coated boards have a better printability and look. Below SBS board is folding box board ("FBB"). This uses a certain amount of "mechanical" pulp, which means that it is not so pure as SBS and has a tendency to yellow more quickly. Below FBB board are certain other products such as white line chipboard; these are used for very basic packaging.

[16] Both Gemini and Trucard were coated SBS boards. They were very similar products; both were high-quality strong double ply boards, and they were essentially interchangeable. The pursuers' coated SBS boards were used in three main product areas: cards (greetings cards, postcards, collectable cards and phone cards), covers (for paperback books, brochures, manuals and catalogues), and packaging (at the premium end of the market, such as labels for clothes, cosmetic boxes, pharmaceutical packaging and audiovisual packaging). Some customers, such as BemroseBooth, purchased both boards prior to the acquisition. BemroseBooth regarded the two as interchangeable.

[17] Following the pursuers' acquisition of the Gemini brand, they moved production of Gemini from the defenders' mill at Carrongrove to their own mill at Markinch. The transition was originally supposed to occur following the end of the Services Period, but in fact the defenders were not able to satisfy the whole demand for Gemini during that period and production at Markinch began slightly before the end of the Services Period. The board produced by the pursuers, known as New Gemini, was manufactured to a slightly different specification from the Gemini board that the defenders had manufactured; it was in fact the same specifications as the pursuers' Trucard board. The result was a slightly glossier finish. Nevertheless, the New Gemini manufactured by the pursuers during the Services Period was accepted without comment by customers, and it seems clear that those who received such board either did not detect any material difference from the board manufactured by the defenders or were content with the difference.

The paper industry

[18] The paper and board industry is international in nature. Of the pursuers' sales, approximately 45 per cent go to the United Kingdom and Ireland and the remainder to other countries. In relation to the acquisition of Gemini, the important markets were Austria, Belgium, Germany, the Netherlands, Italy, Spain and Switzerland, as well as the United Kingdom and Ireland. The main Gemini sales areas were Germany, Benelux and the United Kingdom. Paper manufacturers sell most of their production to paper merchants; these function as distributors, selling on to printers and other users. Some sales, however, are made by the manufacturer directly to printers or publishers; this was a feature of the pursuers' sales in the United Kingdom. Merchants typically sell products from a variety of paper producers and deliver paper quickly and efficiently in relatively smaller quantities to local printers. They hold stocks of paper or board which they sell to customers. In addition they may make indent purchases, where a quantity of paper or board is acquired for a specific requirement of one of their customers. Indent purchases are delivered directly from the mill, and are usually in larger volumes. As a result the price tends to be lower. In the period with which this action is concerned, it was noticeable that small local merchants and printers were tending to join together to form larger pan-European or even global businesses. The result of that was that, if such a merchant had problems with a manufacturer in one particular territory, knowledge of those problems might spread to the merchant's businesses or affiliated businesses in other territories, and the result could be more extensive damage to the manufacturer's brand.

Process of manufacture: quality standards

[19] Mr Sinclair gave evidence (written statement, paragraphs 38 and 39) that quality of product and consistency of quality is a prerequisite for success in the SBS market. Two types of quality standards operate. First, the board must conform to the values and tolerances set out on specification data sheets relating to the particular product. These include such elements as whiteness, brightness, thickness, gloss and grammage (weight in relation to area). These are easily measurable, and if a product falls outside the relevant tolerances it will be defective. In this respect, Mr Sinclair gave evidence that there was no significant difference in quality between Gemini as produced by the defenders and New Gemini as produced by the pursuers. Secondly, the board must be fit for purpose. This is not an exact measure but is based on norms and experience in the industry. The normal range of purposes for which any particular board is fit is set out in specification data sheets, although further purposes could be agreed with customers. Board is unlikely to be fit for purpose where, for example, there are faults in production which result in cracked or weak coating, scratches, or weak lamination between the board plies. In some cases a certain number of scratches may be acceptable, but, depending upon the ultimate use of the board, a point would be reached when the number is not acceptable. In relation to bonding, the pursuers determine strength by a measure known as Scott Bond. If the Scott Bond is a certain level pursuers know that the board is likely to withstand everything that is likely to occur if it is used for the purposes for which it is designed; if it falls below that level, however, it may split apart, depending on the purpose for which it is being used. In this respect, a weaker bond will be acceptable if the board is not subject to much handling. Much SBS board is, however, supplied for high-quality packaging, where it is liable to be subject to cutting, shaping, varnishing and other finishing techniques; these involve considerable handling, and a high bond strength is required.

[20] In the production of board and other paper products a certain number of quality complaints are inevitable. Mr Sinclair, who gave evidence on this matter (written statement, paragraph 39 onwards; 29 October, 3.12 onwards), stated that because paper and board are natural products it is impossible, even using modern technology, to guarantee that all of the material supplied will be of an acceptable quality. Usually the problem with the paper or board will only be discovered when it gets to the printer, and the printer will raise the problem with the merchant and the merchant with the manufacturer. Consequently all manufacturers have detailed complaint handling procedures in place, and their marketing departments and marketing teams attach great importance to dealing properly with complaints. Dealing with complaints fairly, expeditiously and courteously is regarded as a critical part of the service provided to customers. It is likewise regarded as vitally important in preserving the reputation of a brand of paper. Mr Sinclair described complaints handling as a "crucial part" of the customer relationship and a vital part of the brand. Mr Dougan also dealt with the technical side of complaints handling (written statement, page 8 onwards). He stated that claims handling tended to operate on fairly standard procedures throughout the industry, and it was usually part of the customer service offered by mills. The main objective, he explained, is to be consistently open and honest when dealing with customers and their complaints. If a justified complaint is turned down, this can undermine the business relationship. If, conversely, an unjustified complaint is paid, that can set an undesirable precedent for the future. I accept the foregoing evidence, which was not seriously challenged. This point is of considerable importance in considering the pursuers' allegations of breach of contract, and I return to it below at paragraphs [96] onwards.

[21] Nevertheless, while a certain number of quality complaints are inevitable, proper quality control procedures should keep these to a reasonable level. The importance of this is obvious: modern printing processes depend on the rapid throughput of material, and if the effects of defective board are more than occasional the printing process is liable to be seriously interrupted. It follows that the maintenance of proper quality control standards is of critical importance. While this will not avoid all complaints, keeping the level of complaints at a reasonable level is vital to maintain good relations with merchants, printers and end users. Moreover, in the case of a branded product, keeping the number of complaints to a reasonable level is of critical importance to maintain the reputation and value of the brand. Evidence of these matters was given by a number of witnesses, including Mr Parr, Mr Sinclair and Dr Cuchra. I did not understand such evidence to be seriously challenged.

[22] The importance of quality control was also considered in the evidence of Mr Dougan (written statement, page 2 onwards). He described the printing process, which can be complex, with the application of as many as 16 layers of ink and varnish in some cases. When small cards are produced, such as telephone cards and scratch cards, large numbers are cut from one sheet, and if even a few are damaged the entire batch needs to be rerun. After printing the board is subjected to finishing processes, which involve creasing, cutting to shape, folding and assembly. Those processes can be costly, and some faults may not be apparent until they take place. The usual industry practice, which was spoken to by many of the witnesses, is that if a defect in the board only becomes apparent during printing, the consequential losses incurred by the printer will be paid by the mill, on the basis that the board was not fit for purpose. The later in the printing and finishing processes the defect appears, the more likely it is that the consequential losses will be substantial. Mr Dougan was the Technical Services Manager for the pursuers, and his description of his job made it clear that maintaining proper standards of quality control and investigating complaints thoroughly were vital aspects of paper and board production. The same can be said of the position of Mr Couper, who was the defenders' Quality Manager. He stated that quality control was important at Carrongrove, both in the sense of ensuring that the produce was of good quality and in dealing with customer complaints. Correct claims handling was an integral part of the business (written statement, paragraph 10).

Reasons for transaction: underlying commercial purpose

[23] The pursuers' reasons for entering into the transaction were explained in detail by Mr Chris Parr and Mr Malcolm Sinclair and, in relation to the financial aspects of the translation, Mr Gary Wallace. Mr Parr explained that the pursuers were a well-known papermaking and specialist coating company based at Markinch, Fife. Related concerns had been making paper on the same site since 1809. Mr Parr stated that Tullis Russell had forged a formidable reputation as a leading independent mill producing consistently high quality products and providing outstanding levels of customer service. He emphasized that the company had a reputation for the unfailing integrity of its employees. On the basis of the employees who gave evidence, I consider that that assertion was entirely justified; I was singularly impressed by the quality of the pursuers' witnesses. Mr Parr further explained that the Tullis Russell Group had been employee owned since 1994, with 71.5% of shares being held by employee benefit trusts or employees and 28.5% by a charitable trust.

[24] Mr Parr explained the background to the acquisition of the Gemini brand. In 2004 a meeting took place. between representatives of the parties, the pursuers being represented by Mr Don Munro, their then Managing Director and Mr Parr and the defenders by Mr Alan Walker and Mr Gordon Thomson. That meeting was intended to discuss the papermaking industry generally, and nothing came from it directly. Subsequently, however, the pursuers were invited by Mr Walker and Mr Thomson to attend a meeting at which the latter suggested merging the two businesses. Mr Munro and Mr Parr explained that, because of Tullis Russell's ownership structure a merger and was not an option. Nevertheless, a further meeting took place subsequently at which the pursuers expressed an interest in buying the Gemini brand and customer order book from the defenders.

[25] The pursuers' interest in acquiring the Gemini brand was based on the strength of the brand and associated goodwill. The pursuers sold most of their product to paper merchant distributors, and manufacturers who sold their product in that way are always under pressure from distributors to reduce costs and to assist in the promotion of products within the distributor's marketplace. Frequently distributors brand their own products as merchant's own label ("MOL") brands. This practice, which in 2005 was becoming more frequent, allows the merchant to move its production between different mills in order to achieve the lowest cost. Mr Sinclair gave evidence that at some levels the market is largely dominated by such brands. The defenders had supplied Gemini for MOL brands in Germany, Spain and the UK. The pursuers had not, however, supplied Trucard for MOL brands. Where, by contrast, the paper mill owns the brand that it manufactures it is protected against distributors who might wish to move production to other mills because the brand has a reputation with the merchant's customers. At the same time the mill benefits from owning the goodwill associated with the brand. It was accordingly attractive for the pursuers to acquire another brand to strengthen their existing portfolio. Having a strong portfolio of brands allows a mill to exploit commercial relationships with more than one merchant, by selling different brands to different merchants who operate within the same territory. Thus, if the pursuers owned both the Trucard and Gemini brands, they could sell branded products to a larger number of stockists, improving their market position.

[26] In addition, the pursuers had unutilized capacity for coated board production, and they wished to make use of that capacity. For the acquisition to make commercial sense, it was essential that the pursuers should fill their unutilized capacity. In 2005 the pursuers' potential coated board manufacturing capacity at Markinch was approximately 75,000 tonnes per annum, but in the early part of that year coated board production was running at approximately 63,500 tonnes per annum. That meant that approximately 11,500 tonnes of available capacity remained to be used. Using that spare capacity would have a disproportionate increase on the pursuers' profits, because all existing fixed costs were covered by existing production and accordingly the contribution provided by any increase in production would all be profit apart from the variable costs associated with the increased production. Because of the pursuers' method of organising production labour costs were all fixed, and the variable costs would therefore consist only of raw materials and some minor items. In addition, the pursuers considered that they could improve margins by dropping some lower margin coated board and replacing this with higher margin Gemini sales. That applied in particular to the North American market, where margins were typically low. Finally, the pursuers thought that operational benefits would arise through longer and therefore more efficient production runs as a result of manufacturing Trucard and Gemini to the same product specification.

[27] Mr Parr further explained that the "Trucard" brand was a range of coated SBS boards designed for printing. That production formed an important part of the pursuers' business. Gemini was also a coated SBS board. The two boards were very similar in terms of market placement, product range, performance and brand awareness. They were also very similar in terms of physical properties, and the pursuers thought that it would be possible to manufacture both Trucard and Gemini on their papermaking machines at Markinch, marketing what was in effect the same board under both brands. This is not uncommon in the papermaking industry; Mr Sinclair gave a number of other examples of the practice. Mr Parr stated that, when the pursuers evaluated the potential acquisition of the Gemini brand, they decided that the product justification should not exceed a period of four years; in other words, the pursuers expected to recover their investment in the brand over a period of four years at most. This was based on the assumption that the value of the brand should remain strong for that period but might decline thereafter. Consequently, by requiring a fairly rapid return on their investment, the pursuers would be able to reduce their risk.

Steps leading to the transaction

[28] The pursuers prepared a high-level financial analysis of the justification for the acquisition together with a comparison of the potential improvement against a budget for 2005/06. This task was performed under the direction of Mr Gary Wallace (written statement, paragraph 6 onwards; evidence on 12 November, 11.48-12.50; final calculations at productions B424-427). This confirmed the more general analysis spoken to by Mr Parr, as set out at paragraph [26] above. In particular, it confirmed that the acquisition of the Gemini brand would yield an opportunity to achieve better margins. It would be possible to use the existing surplus coated board manufacturing capacity at Markinch (11,500 tonnes per annum) and drop approximately 12,000 tonnes per annum of the pursuers' less profitable coated board business, replacing that with Gemini business that commanded a better margin. This would mean that the pursuers were taking on approximately 23,500 tonnes of the defenders' existing coated SBS business, which was estimated to be 38,000 tonnes. Thus the pursuers would be able to concentrate on the most profitable parts of both brands. This was achievable without incurring any additional labour, maintenance or production costs, as all of these were included in the cost of the existing products. Labour costs were fixed, as mentioned above, and did not vary according to the amount of board produced. The result was that the pursuers could produce an additional 11,500 tonnes of coated SBS board for the cost of the raw materials and the cost of delivering the product to the end customer. Mr Wallace also looked at the pursuers' own customer profitability analysis, and identified 12,000 tonnes of business which was sold at a negative margin. This meant that the selling price was greater than the cost of the raw materials and delivery costs but was insufficient to recover fully all of the labour, maintenance and production costs. Mr Wallace estimated that it would be possible to replace 12,000 tonnes of such business with 12,000 tonnes of Gemini at the pursuers' average mill margin of £112 per tonne; that would mean that the pursuers would recover all of their labour, maintenance and production costs and also earn an extra £112 per tonne of margin. That would mean converting, in total, 23,500 tonnes of Gemini's sales out of approximately 38,000 tonnes. Mr Wallace considered that to be realistic. Nevertheless, because he was unsure of the sales mix between reels and sheets, he allowed for the additional tonnage (11,500 tonnes) to be finished externally at a cost of £100 per tonne. Overall, Mr Wallace estimated that the pursuers should expect to achieve an average contribution of £233.60 per tonne from the Gemini business acquired as a result of the transaction. The result was that the pursuers would be able to fill the capacity of their production machine and improve their sales mix, and the result was very attractive financially for them.

[29] The pursuers were familiar with the Gemini brand, and could therefore identify with reasonable certainty who the main customers were. They believed that Gemini prices were similar to Trucard prices in key markets. On that basis, Mr Malcolm Sinclair prepared a market analysis paper which looked at the proposed acquisition from a market perspective (produced at B419-423; discussed in written statement at paragraph 49 onwards; evidence on 29 October at 3.25). This indicated benefits that could accrue from the acquisition of the Gemini brand, including the strength of the brand, the pursuers' ability to match the weights of Gemini board and the comparable physical characteristics of the two boards; the last of these meant that most printers regarded the products as interchangeable. In addition, Gemini had an attractive position in the key markets of Germany, Benelux and the UK.

[30] The financial justification and market analysis were presented to the Tullis Russell Group board on 24 March 2005. The maximum payback period was discussed and it was concluded that 48 months was appropriate. Sensitivities, such as a possible 10% reduction in volume or margin, were discussed. It was agreed that Mr Munro could offer up to £15 million for the Gemini brand and the defenders' order book. Thereafter Mr Munro, Mr Parr and Mr Fred Bowden, the Tullis Russell Chairman, met Mr Walker and Mr Thomson on 26 April to discuss the proposed acquisition. Mr Parr's evidence was that Mr Walker had suggested that the pursuers should take on two key employees of the defenders, Mr Roland MacLeod and Mr Ron Law, but that was not acceptable to the pursuers' representatives. Mr Munro explained the rationale for the acquisition and that the pursuers' preferred route was to make all of their coated branded SBS product to the same specification, thereby deriving significant operational and stockholding benefits but maintaining the two brand names of Trucard and Gemini in the marketplace. Mr Walker expressed reservations about this course of action, but Mr Bowden and Mr Munro explained that it was not unusual in the paper industry and should present no difficulties. Mr Parr's impression was that Mr Walker and Mr Thomson did not have a full understanding of the defenders' products, routes to market and customers, owing to their limited involvement in the defenders' board manufacturing business.

[31] At a further meeting of the Tullis Russell Group board on 28 April it was confirmed that heads of terms had been agreed and that due diligence was scheduled for 4 and 5 May. The heads of terms were that the pursuers would offer to purchase the Gemini brand for £13 million with a further payment of £2 million if more than 30,000 tonnes of Gemini business were successfully transferred. Those terms were subject to due diligence, shareholder approval and suitable financing. At the meeting the Group board also discussed significant news that they had received that on 26 April, Stora Enso, a large Finnish paper producer who produced a competing SBS board, had announced its intention to acquire a German paper merchant named Schneidersoehne; Schneidersoehne were the defenders' largest customer. There was accordingly a risk that Stora Enso would compel Schneidersoehne to take its own board rather than Gemini. Mr Parr agreed to consider the sensitivity of this development and to report back to the Group board.

[32] Mr Parr then prepared a memorandum for the Group Board considering two alternative scenarios, namely that half of the Schneidersoehne business would be lost after two years and that all of that business would be lost after two years. These were viewed as worst-case scenarios, because Schneidersoehne had made a large investment in promoting the Gemini brand and it was thought unlikely that this investment would be undermined immediately. That is what had happened when Stora Enso had acquired another large paper merchant, Papyrus, in the late 1990s; Papyrus was still selling Gemini in 2004. In any event, some of the lost business could be replaced. As a worst case, Mr Parr thought that the payback period would be extended to 49.9 months.

[33] Subsequently the defenders prepared a data room in North Queensferry for the purpose of the pursuers' due diligence exercise, and on 4 and 5 May the pursuers' representatives were given access to extensive documentation on the defenders' business. Mr Thomson handled the data room himself, and explained that he and Mr Walker wanted to exclude executive members of the defenders' team from the discussions as the latter were unaware of any potential sale of the brand. The data room was attended by Mr Parr, Mr Sinclair and Mr Wallace on behalf of the pursuers. The resulting report, prepared by Mr Sinclair and Mr Wallace, was positive. Customers' names had not been provided, but it was apparent that there were strong sales in key markets at prices that were higher than had been expected. It was also apparent that there was a core part of the Gemini business that would improve the pursuers' coated SBS sales if transferred successfully.

[34] The decision to split the transaction between two agreements, the Asset Purchase Agreement and the Services Agreement, came about as follows. Division of the transaction was initially suggested by the defenders, because they had underutilized tax losses which they would be able to set off against revenue payments but not capital payments. Under an arrangement such as that contained in the Services Agreement the payments to them would be revenue in nature, and thus they could make use of the tax losses that they had carried forward. Mr Parr stated that the concept of a Services Period, extending over the five-month period from 9 June 2005 to 8 November 2005, was also driven by the defenders' requirements. The defenders wanted time to run their production down and increase their profits as much as possible during the year ended 31 December 2005. A further Tullis Russell Group board meeting was held on 26 May. By that time the defenders had proposed that the transaction should be contained in two agreements, and at the meeting it was suggested that payment to the defenders should be linked to the performance of services performed by them during a five-month interim period, which would help to ensure that the integrity and name of the Gemini brand were protected. It was eventually agreed that £5,000,000 should be paid to the defenders during the Services Period. Mr Parr stated that this amount reflected the importance to the pursuers of protecting the integrity of the brand and associated goodwill. The pursuers could have got production running at full capacity before November, but they were content to assist the defenders in this respect, and used the Services Period to ensure that they were fully ready for the handover by planning for the integration of Gemini into their manufacturing process and by preparing promotional material and engaging with the defenders' customers. The pursuers were anxious to ensure that the splitting of the agreement would not cause any accounting or tax difficulties for them; in particular they did not want any element of the payments made to the defenders to be treated as revenue within their accounts and written off immediately to the profit and loss account. As far as the pursuers were concerned, the total of the amounts paid under the two agreements was the price they were to pay for the brand and associated goodwill. That treatment was agreed by the pursuers' auditors, Deloitte, who had been advising on the transaction. Mr Parr prepared a memorandum for the Group board discussing accounting treatment; this indicated that acquisition was predicated on the assumption that the pursuers would derive value from the brand over five years, and that the value of the brand and associated goodwill would be written off over that period. Mr Parr described this as a "cautious and prudent" approach.

[35] In relation to the Services Period, Mr Parr stated that it was important for the pursuers that standards should be maintained. The fact that the defenders received benefit from the sales made during the period was one way of providing incentives to continue operating in the normal way until the handover in November. The defenders were required to maintain continuity of manufacture and conduct themselves as if they were conducting business as usual. They were also required to manufacture to standards operated prior to the acquisition and specifically as set out in the data sheets that had been disclosed in the data room. I should observe that it was clear that these matters were of great importance to the pursuers, as they were designed to protect the integrity and goodwill of the brand that they were acquiring. I further consider it clear that any reasonable paper manufacturer in the position of the defenders ought to have realized that these matters were important in protecting the Gemini brand.

[36] Mr Parr further gave evidence that during the Services Period the pursuers were totally open with existing Trucard and Gemini customers about their plans for the integration of the Gemini brand and that both products would be made to the same specification. The pursuers spent considerable time explaining to Gemini customers the minor differences that existed between the defenders' Gemini product and the product that the pursuers intended to produce, and also explaining the steps that the pursuers were planning to take to promote the Gemini brand in various markets. These activities were all well received by customers, especially the news about promotion of the brand, which had received little investment from the defenders in the years leading up to the acquisition.

The parties' contracts

[37] For the reasons described in the last section, the parties' transaction was divided into two agreements, the Asset Purchase Agreement and the Services Agreement. I will deal with these in turn. The pursuers' claim is based primarily on provisions of the Services Agreement, but the basic terms of the Asset Purchase Agreement are of importance in setting the context within which the Services Agreement operated.

The Asset Purchase Agreement

[38] The Asset Purchase Agreement was concluded between the parties on 9 June 2005. Its material provisions were as follows. Under clause 2, the defenders agreed to sell and the pursuers agreed to purchase certain assets, namely the Owned Intellectual Property Rights, the Customer Information and the Related Assets, for total consideration of £5 million. In addition, additional consideration might be payable in certain circumstances, in the event that the pursuers' sales of Gemini products exceeded defined levels. The defenders have a claim for additional consideration, which is the subject of the action brought by them against the pursuers referred to above at paragraph [3]. So far as the present action is concerned, that claim is only material to the defenders plea of retention, discussed below at paragraph [314]. "Owned Intellectual Property Rights" were defined as all intellectual property rights owned or used by the defenders in connection with the manufacture and sale by the defenders of paper board products sold under the Gemini brand. (A further brand, "InverX" was included, but it was not regarded as commercially significant by the pursuers). "Customer Information" was defined as all lists of customers who had purchased paper board products from the defenders, rebate and similar agreements, credit reports, price lists, cost records, catalogues and advertising relating to the Assets; the "Assets" were defined as the Owned Intellectual Property Rights, the Customer Information and the Related Assets. Thus the assets sold by the defenders to the pursuers included information about customers who purchased the Gemini brand. The Related Assets consisted of an embossing machine located at the defenders' premises together with related designs.

[39] For present purposes, the important assets are the Owned Intellectual Property Rights and the Customer Information. In practical terms, the former consisted of the Gemini brand and trademarks and associated goodwill; these and the relative Customer Information were the items that were perceived as having significant value. Evidence was led from a number of witnesses, notably Mr Parr, Mr Sinclair and Dr Cuchra, to the effect that a brand is an important form of intellectual property right. A brand is particularly significant in an industry with complex distribution patterns, such as the paper and board industry. The important point is that printers and end users, if they are aware of the brand and its reputation, will frequently specify that brand to the merchant; in that way the manufacturer's own brand can have a significant advantage over merchant's own label board, which helps to overcome the fact that the latter is frequently cheaper. The Customer Information consisted, for practical purposes, of the list of customers who had purchased Gemini products from the defenders together with details of the defenders' dealings with such customers and details of the way in which the defenders had marketed Gemini products. Mr Parr (27 October, 12.20) stated that such information was material to the acquisition of the brand, in order that the pursuers as purchasers of the brand would know how to deal with customers; it was important to note such matters as their credit arrangements, the prices charged and the rebates offered to individual customers. The result of clause 2 of the Acquisition Agreement was that the pursuers acquired the Gemini brand, trademarks and goodwill and the various related rights immediately, with effect from 9 June 2005, the date when the two agreements were executed (which was the Completion Date for the purposes of the agreement). The effect of the Services Agreement was accordingly that during the subsequent period of five months the defenders would continue to manufacture Gemini board under licence from the pursuers, but by that stage the Gemini brand, trademark and goodwill were the property of the pursuers.

[40] Although the breaches of contract relied on by the pursuers arise primarily out of the terms of the Services Agreement, they found in part on clause 15.4 of the Asset Purchase Agreement. This was in the following terms:

"The [defenders] shall promptly notify the [pursuers] of any claims against the [defenders] brought by any third party in respect of any goods manufactured..., derived from any of the Assets and the [defenders] shall not without the [pursuers'] prior written consent to take any steps in relation to such claim which might reasonably be expected to damage the commercial interests of the [pursuers]".

[41] In summary, the effect of the Asset Purchase Agreement was that the defenders sold the pursuers all rights to the Gemini brand and trademarks, all associated goodwill and all customer information relative to that brand in exchange for a sum of £5,000,000 plus any additional consideration that might become payable. In addition, a further sum of £5,000,000 was payable under the Services Agreement. Although on the face of the latter agreement that sum represented consideration for the services provided by the defenders under the agreement, I think it clear that it formed part of the total consideration for the whole transaction. That appears from the fact that the price paid by customers for the manufacture of Gemini board during the Services Period was available to the defenders, not the pursuers. Consequently, the defenders should be regarded as selling the Gemini brand, trademarks and goodwill in exchange for a basic consideration of £10,000,000, together with any additional consideration that might be due. On that basis, I consider it clear that the intention of the parties was that the defenders should transfer to the pursuers the full benefit of the Gemini brand, including the goodwill of the brand, together with the business of the customers who had purchased Gemini products in the past. The Services Agreement must be construed against that background.

The Services Agreement

[42] The Services Agreement was also concluded on 9 June 2005. It began with a series of recitals. Recital (C) stated the reasons for the agreement:

"Tullis Russell have requested that Inveresk enter into this agreement for the purposes of ensuring continuity in the manufacture and distribution of the Products, and to facilitate the integration of such manufacture and distribution into the existing Tullis Russell operations and to enable Tullis Russell to obtain the full benefit and value of the assets being acquired under the Asset Purchase Agreement".

The Products were defined as paper [board] products which have been coated with solid bleached sulphate. Both Trucard and Gemini were products of that nature. Recital (C) is in my view wholly consistent with the evidence, summarized above at paragraphs [34] and [35], relating to the reasons for the division of the transaction into two agreements. From the pursuers' point of view, the advantage of the Services Period was to enable a smooth transition in the manufacture and distribution of Gemini products from the defenders, and that is precisely what recital (C) says.

[43] The services to be provided under the agreement were set out in clause 2.1. So far as material, this provides as follows:

"The parties recognise that the purpose of this agreement is to allow Tullis Russell time to integrate the manufacture and distribution of the Products into its existing operations without adversely impacting on the manufacture and supply of the Products in the period prior to the Completion Date [defined as 8 November 2005] and to protect the value of Tullis Russell's investment in the Owned Intellectual Property Rights in terms of the Asset Purchase Agreement. In consideration of the fee identified in Clause 3 below and at the request of Tullis Russell, Inveresk shall during the Life of this Agreement:

...

(c) use all reasonable endeavours to protect the Trade Marks, maintain the existing levels of customer service to purchasers and potential purchasers of Products and Licensed Products [products bearing the Gemini trademark] and promote a successful integration of the Owned Intellectual Property Rights into Tullis Russell.

...

(e) maintain continuity of manufacturing and conduct its business in the ordinary and usual way so as to maintain that business relating to the Products and the Licensed Products as a going concern ..."

Clause 2.2 narrated that the defenders had agreed to continue to assume the trading risk in respect of the business from the date of that agreement until the Completion Date (8 November 1995). Clause 2.5 provided that the defenders would promptly provide all Customer Information to the pursuers and that "Tullis Russell shall be entitled following the date of this Agreement to contact customers of the Business to discuss arrangements for the manufacture of Products by Tullis Russell following the Completion Date". In relation to the manufacture of Gemini board by the defenders during the Services Period, clause 4 provided that the pursuers would grant the defenders a licence to permit such manufacture to take place. That licence was of course the fundamental legal underpinning for the defenders' manufacture of board during the Services Period, and emphasises is that any damage that might occur to the brand or customer relations would impact on the pursuers, not the defenders.

[44] Clause 3 of the Services Agreement provided for payment. Clause 3.1 was in the following terms:

"In consideration of (i) continuing to manufacture and distribute the Licensed Product (ii) the undertakings provided by Inveresk to Tullis Russell in respect of the maintenance of the Trade Marks during the Life of this Agreement and (iii) the use of the Trade Marks in accordance with the terms of this Agreement, ...Tullis Russell shall pay to Inveresk a monthly fee of £1,000,000 Sterling payable on [dates falling 30, 60, 90, 120 and 150 days after the date of the Agreement]".

Provision was also made for the payment of rebates due to customers.

[45] Clause 5, headed "Standard of Quality", provided at 5.1 as follows:

"Inveresk shall not sell any Licensed Product which fails to comply in any respect with the Quality Standards. Without prejudice to the foregoing generality, Inveresk shall comply with all applicable statutory and regulatory requirements relating to the manufacturing, marketing, labelling, distribution and sale of the licensed Products".

The "Quality Standards" were defined (in clause 1.1) as the quality standards in place immediately prior to the date of the Services Agreement as set out in the Specification Data sheets which were supposed to be, but were not, attached to the Agreement. Clause 5.3 stated that the defenders would on reasonable notice cease manufacturing and selling any Licensed Products which failed to comply with the Quality Standards, "and take such corrective action (including withdrawing the Licensed Product from the marketplace) as Tullis Russell may reasonably require".

[46] Clause 14 is significant principally in relation to the pursuers' claim for indemnity in the first conclusion of the summons. Clause 14.6 provided as follows:

"Tullis Russell agrees and undertakes to settle on behalf of the Licensee [Inveresk] any Customer Claims having an aggregate value of not more than £200,000 inclusive of all related costs and expenses and shall be entitled to retain the sum of £200,000 from the Stock Payment to be applied in settling any Customer Claims in terms of Clause 14.7. Inveresk shall indemnify and keep Tullis Russell indemnified against all Losses and Expenses incurred by Tullis Russell and arising from Customer Claims to the extent that the aggregate value of such Customer Claims exceeds £200,000".

Clause 14.7 provided as follows:

"Tullis Russell shall consult with Inveresk in relation to any Customer Claims and shall act reasonably in considering Inveresk's suggestions and keep Inveresk reasonably advised of the progress and settlement of any Customer Claims, provided that Tullis Russell shall not take or refrain from taking any action if to do so would in the opinion of Tullis Russell (acting reasonably) materially prejudice the goodwill of Tullis Russell or materially and adversely affect Tullis Russell's relationship with any customer".

[47] Finally, in relation to goodwill, clause 16.2 provided as follows:

"Except with the prior written consent of Tullis Russell, Inveresk shall not, whether on its own behalf, or whether directly or indirectly on behalf of any person or business, or with any Connected Person:

...

(d) Goodwill

at any time after the Completion Date, do or say anything which is likely or intended to damage the goodwill or reputation of the Owned Intellectual Property Rights or which may lead any person to cease to do business with the Purchaser on essentially equivalent terms to those previously offered or lead any person not to engage in business with Purchaser".

Analysis of breaches of contract alleged by pursuers
[48] In general terms, the pursuers claim that the defenders were in breach of contract in two respects: first, the quality of the board manufactured by the defenders during the Services Period was seriously and repeatedly defective, to an extent that amounted to a breach of the parties' agreements; and secondly, the way in which the defenders dealt with customer complaints about defective product also amounted to a breach of those agreements. The contractual clauses relied on by the pursuers are clauses 2.1(c) and (e), 5, 14.6 and 16.2(d) of the Services Agreement and clause 15.4 of the Asset Purchase Agreement, all of which are quoted above.

[49] In construing the parties' contracts, the following four factors appear to me to be highly relevant.

(i) The parties' transaction was conceived as a unity, and the two agreements, the Asset Purchase Agreement and the Services Agreement, should be construed accordingly.

(ii) Under the Asset Purchase Agreement, the Gemini brand and trademark and associated goodwill were transferred to the pursuers with immediate effect. Consequently the manufacture of Gemini board by the defenders during the Services Period was carried out under licence from the pursuers.

(iii) The fundamental purpose of the transaction was the sale by the defenders to the pursuers of the Gemini brand, trademarks and associated goodwill. The total consideration payable in respect of the whole transaction amounted to at least £10,000,000, £5,000,000 of which was payable under the Asset Purchase Agreement and £5,000,000 under the Services Agreement; in addition to those sums, additional consideration might be payable under clause 5 of and part 3 to the schedule to the Asset Purchase Agreement. Thus the parties clearly thought that the Gemini brand, trademarks and goodwill had very substantial commercial value.

(iv) The assets acquired are intangible; their value lies in the likelihood that those who have purchased (or considered purchasing) the Gemini brand in the past will continue to do so in future. That involves a continuing customer relationship. Consequently anything that damages or threatens to damage the customer relationship can be regarded as striking at the fundamental purpose of the parties' transaction.

[50] I will now turn to the specific contractual provisions founded on by the pursuers.

Clause 2.1(c) and (e)

[51] Clause 2.1(c) obliges the defenders to take steps to protect the value of the assets acquired by the pursuers during the Services Period. That makes obvious sense in a transaction of this nature; the pursuers were paying a large sum for a range of incorporeal rights, and it was obviously of the greatest importance to them to ensure that those rights were not damaged in any way during the transitional period before they assumed sole responsibility for the Gemini brand and customers. It seems to me, therefore, that the obligations in clause 2.1(c) should be interpreted in accordance with their fundamental commercial significance in the scheme of the two agreements taken as a whole. In my opinion these clauses require the defenders to ensure that, during the Services Period, defects in their production of Gemini board did not exceed a reasonable level; what is a reasonable level is to be determined by the normal level of defects exhibited according to historic standards. Thus the obligation is to ensure that production during the Services Period did not give rise to more than a normal level of complaints. That in my view was of critical importance in preserving the reputation of the brand and the Gemini customer book. If during the Services Period the level of defects was substantially in excess of the normal level, it seems to me obvious as a matter of common sense that damage to the brand is likely. In any event, the evidence clearly established that such damage was likely; evidence to that effect was given by Messrs Park, Sinclair, Wallace, Tschoner, Hasecker, Rigg and MacLeod, and also from an expert point of view by Dr Cuchra.

[52] By "normal level" of defects I mean something that approximates to the historic norm. As explained above (paragraph [20]), a certain level of defects is inevitable in the manufacture of paper and board. Nevertheless, it was clear that historic averages could be worked out, and these can be used to devise a normal level of defects and complaints. The defenders submitted that, unless a precise line could be drawn between conduct which constituted a breach of the clause and conduct which did not, the clause would be void for uncertainty; reference was made to McArthur v Lawson, 1877, 4 R 1134. That case concerned an alleged contract of partnership that was clearly lacking in its essential provisions. It is not in my opinion relevant to cases such as the present, where the obligation is to perform a certain task to a reasonable standard. In this case, the test of reasonableness is to be determined according to historic norms. That provides an objective criterion that can be given content by the court, and thus can be enforced. No doubt borderline cases may arise, and the court must simply decide these on their individual merits. This is not a borderline case, however. The evidence discussed in detail below indicates in my opinion that the level of complaints resulting from production during the Services Period was greatly in excess of the norm, to such an extent that there was a clear breach of clause 2.1(c), and also clause 2.1(e).

[53] For the defenders it was submitted that the terms of clause 2.1(c) were inconsistent with an obligation to manufacture products that were fit for purpose and were of satisfactory quality. In addition, they founded on the fact that other provisions in the agreement, notably clause 5.1, made provision for quality standards. I agree that clause 2.1(c) does not of itself impose an obligation to manufacture products that are fit for purpose and of satisfactory quality. Nevertheless, the obligation to use all reasonable endeavours to protect the trademarks involves in my opinion using reasonable endeavours to avoid conduct that was liable to cause damage to the trademarks. To the extent that that involves maintaining normal standards of quality, I think that it is plainly implicit in the clause. The fact that quality standards are dealt with elsewhere does not seem to me to be of great significance; it is common in complex commercial agreements to find that the obligations of one party overlap with one another. Indeed, in respect of the most fundamental obligations, it is hardly surprising that there is such an overlap, simply because of the very basic nature of such obligations. The obligation to protect the value of the property sold appears to me to fall into that category.

[54] Clause 2.1(e) imposes obligations on the defenders in relation to continuity of manufacturing and conduct of the business, so that the business relating to among other things the acquired intellectual property is maintained as a going concern. This is perhaps of less direct relevance than clause 2.1(c) to the product standards, but it must I think involve the proposition that the defenders will refrain from conduct that is liable to damage the Gemini business as a going concern. In view of the opening part of clause 2.1, I also think it clear that the reason for maintaining the business relating to the acquired intellectual property rights as a going concern was to ensure its integration into the pursuers' business. That carried the necessary implication that the defenders would not engage in conduct that was likely to damage that business. That would cover both the supply of defective board at levels well above the norm and the adoption of an antagonistic attitude towards customers who complained.

Clause 5.1
[55] The foregoing construction of clause 2.1 is reinforced to some extent by the terms of clause 5.1, which obliges the defenders not to sell Gemini board which fails to comply with the Quality Standards, and further obliges them to comply with all applicable statutory and regulatory requirements relating to the manufacture of Gemini. A problem with this clause relates to the identification of the relevant Quality Standards. These are defined in clause 1.1 of the Services Agreement as those set out in the Specification Data Sheets annexed to the agreement, but in fact nothing was annexed. Evidence was led to the effect that the documents that should have been annexed were productions L3437, 3439 and 3441 (Mr Sinclair, 21 October, 3.42). Those documents give a considerable amount of information about the precise specifications of the board, including matters such as its nature and composition, its potential uses, its conformity to a range of British, German and other standards and its weight, gloss, smoothness, whiteness and moisture content. The pursuers' complaints about the Gemini produced during the Services Period, however, do not, relate to these matters but to the basic quality of the product: they rather involve defects such as delamination, picking and scoring. Consequently I do not think that the failure to annex the Specification Data Sheets is of direct significance to the substance of the pursuers' claim. Nevertheless, I am of opinion that it was established in evidence that the documents that should have been annexed were those found at productions L3437, 3439 and 3441 and that the Services Agreement should accordingly be construed as if those documents had been annexed. The reference to that material indicates that the parties intended that during the Services Period the business would be carried on in a proper manner, producing Gemini board that generally conformed to specification. Because of the inherent likelihood that some defective board will be produced, it obviously cannot be expected that all board would conform to specification, but it must have been intended that the incidence of board that did not so conform should be within normal limits. If the defenders are obliged to ensure that the incidence of failures to conform to the Specification Data Sheets is kept within normal limits, it would be extraordinary if they were permitted to produce board with a very high incidence of other defects, such as delamination and picking; that would not make commercial sense.

[56] In their pleadings (article 13 of condescendence) the pursuers seek rectification of the Services agreement in order to annex the Specification Data Sheets that were produced as productions L3437, 3439 and 3441. In their submissions, however, they adopted the primary position that the contract should simply be construed as if the reference to Specification Data Sheets in clause 5.1 were a reference to those three productions. This represents a familiar shift in the modern approach to the construction of contracts, whereby the wording of a contract may be construed in a manner that gives effect to the parties' clear commercial purposes without the need for the formal process of rectification. For the defenders, it was submitted that to construe the contract in that way was inconsistent with the clear terms of clause 5.1 and the relative definitions. The defenders further submitted that there was no error in the words of clause 5.1 or the definitions provisions; the error rather related to the annexation of a document to the contract. In my opinion it was clearly established that the three documents forming productions L3437, 3439 and 3441 were the documents that should have been annexed, and I am satisfied that their omission was a very obvious error. For that reason I consider that the contract should be construed as if they had been so annexed. There is no need for formal rectification; that is standard modern practice. The defenders further submitted that the three documents relied on as the Specification Data Sheets had not been adequately identified. Mr Parr, who was involved in negotiating the agreement, did not give evidence about them. Mr Sinclair did identify them, but stated that he had not been involved in the conclusion of the Services Agreement. Nevertheless, Mr Sinclair was involved in examining the information in the defenders' data room (written statement, paragraph 56), and his evidence that the three documents were the Specification Data Sheets was not challenged. No evidence was led that any other document might have been referred to in the contract. I accordingly reject this contention for the defenders. Nevertheless, the significance of these documents is limited, as discussed in the last paragraph.

[57] Clause 5.1 goes on to provide that the defenders in producing board are to comply with all applicable statutory and regulatory requirements relating to among other things the manufacture and sale of the licensed products. For the pursuers it was contended that this requirement included compliance with section 14 of the Sale of Goods Act 1979, which provides that goods sold in the course of a business must be of satisfactory quality and fit for all the purposes for which goods of the kind in question are commonly supplied. For the defenders, it was submitted that such requirements had not been referred to either in clause 5.1 itself or in any Specification Data Sheet. It was impossible to imply any term that production should conform to the standards in the Sale of Goods Act, because that was inconsistent with the express provisions of the contract. Moreover, it was impossible to ensure that all board was in accordance with the requirements of satisfactory quality and fitness for purpose. Consequently, if clause 5.1 imported those requirements, a breach of it was inevitable, and that would have the absurd consequence that the pursuers could terminate the Services Agreement and thereby relieve themselves of the obligation to pay the monthly fee of £1 million under that agreement. In my opinion the defenders' argument is misconceived. The critical point, as explained at paragraphs [51] and [52] above, is that any obligation as to quality standards should be interpreted in such a way as to require that defective board is kept to normal levels. The mere existence of a defect would not amount to a breach of either clause 2.1(c) or clause 5.1; it is only a level of defects significantly above historic norms that would count as a breach. In relation to clause 5.1 this involves construing the clause as requiring compliance with the standards in section 14 of the Sale of Goods Act to the extent that is normal in the industry. Consequently, the supply of some material that does not conform to those standards would not amount to a breach of clause 5.1.

[58] I accordingly construe the second part of clause 5.1 as requiring the defenders to comply with the requirements in section 14 of the Sale of Goods Act that goods supplied should be of satisfactory quality and fit for purpose, to the extent that is normal in the paper and board industry. I recognize that that involves a somewhat inexact standard, and that borderline cases could easily occur. Nevertheless, the fact that a line cannot be drawn with precision does not mean that a distinction does not exist. It is unnecessary to consider this matter further in the present case because I am satisfied that the level of defects exhibited by the defenders' production during the Services Period was greatly in excess of historic norms. Finally, I should note that to construe clause 5.1 in this way does not in my opinion require the implication of anything into it. The clause refers to "all applicable statutory...requirements relating to the manufacture...and sale of the licensed Products", and that wording is quite habile to cover section 14.

Clauses 14.6 and 14.7
[59] Clause 14.6 deals with the settlement of customer claims. These are defined as claims, demands or proceedings by a customer relating to products manufactured and supplied by the defenders during the Services Period. The basic scheme of the clause, whose terms are set out above at paragraph [46], is that the pursuers are to settle such claims up to an aggregate value of not more than £200,000, and are entitled to retain such a sum from a payment, the Stock Payment, that they were due to make to the defenders. The defenders were to indemnify the pursuers against all such claims to the extent that their aggregate value exceeded £200,000. The detailed construction of this clause is relevant to the pursuers' claim for payment under the first conclusion, which is discussed below. So far as the damages claim is concerned, the clause implies that the pursuers should handle customer complaints arising out of production during the Services Period. Clause 14.7 provides that the pursuers are to consult with the defenders in relation to any customer claims and are to act reasonably in considering the defenders' suggestions and are to keep the defenders reasonably advised of the progress and settlement of any such claims.

[60] A large part of the evidence related to the handling of customer claims. It is clear that the parties innovated on the provisions of clauses 14.6 and 14.7. The defenders were allowed to settle claims during the Services Period, and thereafter in practice they were permitted to continue dealing with some of those claims, in effect under a protocol that supplemented the terms of the Services Agreement. This involved liaison between the parties as to the manner in which such complaints were dealt with. In particular, Mr Dougan and Mr Couper were both involved in the assessment of complaints, and the parties corresponded about individual cases. The pursuers maintained, however, that an attempt by Mr Walker in January and February 2006 to assert the defenders right to deal with all claims, to the exclusion of the pursuers, was a breach of clauses 14.6 and 14.7. At that point the defenders began to contact customers directly, and that caused confusion and uncertainty among customers and in the settlement of claims. The result was considerable delay, which had an adverse effect on customer relations.

[61] For the defenders it was submitted that, while the defenders made contact with some customers, notably BemroseBooth, Scientific Games International, Papier Union, IT Papier and McNaughton, all such conduct was either justified in the circumstances or had not been shown to have any adverse effect on customer relations. In my opinion the evidence established that the defenders had meddled in claims that were not strictly their responsibility. This contributed to confusion and delay in dealing with a substantial number of justified customer complaints. In my opinion it clearly had some adverse effect on customer relations. This did not occur in isolation. In addition, the attitude taken by the defenders to customer complaints from January 2006 onwards became very obstructive and in some cases downright aggressive. It is the totality of the defenders' conduct in dealing with customer complaints that I consider amounts to a clear breach of the provisions of the parties' contract. That does, however, in part involve a breach of clauses 14.6 and 14.7.

Clause 16.2(d)

[62] Clause 16.2(d), whose terms are quoted above at paragraph [46], provides that the defenders will not at any time after the Completion Date do or say anything which is likely or intended to damage the goodwill or reputation of the Owned Intellectual Property Rights or which may lead any person to cease to do business with the pursuers on substantially equivalent terms to those previously offered by the defenders or lead any person not to engage in business with the pursuers. The terms of the clause are fairly self-explanatory. The purpose is obvious: the pursuers were paying a large amount of money for the goodwill and customer list of the Gemini brand, and they clearly did not want anything to be done that might damage the value of those assets in any way.

[63] Clause 16.2(d) has effect after the Completion Date, which is the end of the Services Period, 8 November 2005. That means that the manufacture of defective products cannot amount to a breach of the clause. In addition, the conduct in question must be likely to damage the goodwill or reputation of the Gemini brand. For the defenders it was submitted that the conduct complained of by the pursuers in the period following the end of the Services Period had not in fact had any serious effect on the brand. In the light of the evidence of the defenders' conduct during that period, however, I am satisfied that it amounted to a breach of clause 16.2(d). In reaching this conclusion, I take account of the aggressive tone of significant parts of the defenders' dealings with customers, the obstructive attitude taken to the settlement of customer claims about defects, the delays in agreeing payment to customers who had valid claims, and the failure to provide information about defective material. The evidence is discussed below. In general, however, two factors combined to threaten the reputation of the brand. The first was the manner of the defenders' dealings with Gemini customers; I think it is self-evident that this could well have an impact, and this view was borne out by the evidence. The second factor was the confusion surrounding the payment of justified claims, in large measure because of the failure of the defenders either to observe the parties' protocol about claims handling or to provide proper information to enable the pursuers to deal properly with customer complaints; such information was essential to enable the pursuers to handle complaints because they did not have information about the manufacture of the allegedly defective product. Once again, it seems to me that this was liable to cause delays in settling justified claims, and that that was in turn liable to have a serious impact on the reputation of the Gemini brand.

Clause 15.4 of the Asset Purchase Agreement

[64] Clause 15.4 of the Asset Purchase Agreement, whose terms are quoted above at paragraph [40], obliges the defenders to notify the pursuers promptly of any claims against the defenders by any third party in respect of any goods manufactured under the Gemini brand; in respect of such claims the defenders are not to take steps which might reasonably be expected to damage the commercial interests of the pursuers. For the defenders it was submitted that the reference to "claims" in this clause should be taken to mean only claims in respect of products manufactured by the defenders prior to the agreements. This was not disputed by the pursuers, who contended that clause 15.4 of the Asset Purchase Agreement dealt with the period prior to the Services Period and clause 16.2(d) of the Services Agreement dealt with claims made subsequently. The two clauses therefore complemented each other. To the extent, therefore, that the pursuers' complaints about the defenders' conduct related to material that had been manufactured before the Services Period, clause 15.4 was relevant. There were in fact 14 such claims; these were identified in the productions at L3277-3288, and comprised in that list numbers 9, 12, 31, 47, 50, 84, 96, 102, 113, 125, 129, 142, 186 and 219 (spoken to by Mr Sinclair, 30 October, 12.12). These claims were dealt with in the detailed analysis of claims contained in Mr Dougan's written statement. In my opinion this analysis is correct. To the extent that the defenders' handling of complaints can be considered as likely to damage the commercial interests of the pursuers as the owners of the Gemini brand, there is a breach of either clause 15.4 or clause 16.2(d), according to the date of manufacture. In assessing the overall effect of the damage, I do not think that it is necessary to distinguish the breaches of the two clauses, which were clearly cumulative in nature.

Global claim: acquisition effects

[65] A final matter that arises in relation to the breach of contract is that the pursuers seek damages on a global basis. This is clear from the pursuers' averments, where the basis of their claim is stated as follows (article 27 of condescendence):

"The defenders' (i) failure to comply with the Quality Standards in terms of Clause 5 of the Services Agreement...and (ii) their failure to comply with the required standards of quality of products in manufactured and Clause 2.1(c) and (e) of the Services Agreement...and (iii) the direct handling of customers and customers' claims...in breach of Clauses 14.6 and 16.2(d) of the Services Agreement and Clause 15.4 of the Acquisition Agreement, were breaches of contract that caused significant loss of sales to the pursuers, not only in relation to the Gemini-branded products but also in the pursuers' business generally, and the consequent loss of profit on those sales. Those breaches of contract caused important customers to cease doing business with the pursuers, caused other customers to reduce the level of orders or not transfer their business from the defenders to the pursuers at all, thereby causing loss to the pursuers...Those particular breaches of contract were committed in the context of the defenders' significant delay in payment of customer rebates (in itself an act in breach of Clause 16.2(d) of the Services Agreement...). Each breach made a contribution to the cumulative loss complained of. In so far as any other conduct condescended upon by the defenders may have contributed to the pursuers' loss of profit, it did not make a substantial contribution to the loss of profit claims".

[66] For the defenders it was submitted that, because the claim was global in nature, it was necessary that the pursuers should prove that all of the factors that are said to have caused the loss identified had occurred and amounted to breaches of contract. In the event that any one or more of those factors did not amount to a breach of contract, the pursuers would have failed to prove their claim. In response, the pursuers submitted that essentially two types of wrongful conduct were founded upon, the manufacture and supply of defective board on a large scale and the treatment of customers who complained. The pursuers' case was that the damage to the acquired assets was attributable to that conduct. If such conduct were in breach of contract, regardless of which clause was the subject of the breach, that was enough to establish the proposition that the pursuers' loss was caused by the breach of contract. The critical point was accordingly whether the pursuers could establish that the events relied upon were in law the responsibility of the defenders. This was always subject to the possibility that the loss might be apportioned between different causes; nevertheless, in the present case the pursuers accepted that there was no evidential basis for apportionment. A further possibility, which was founded on to some extent by the pursuers, was to characterize the defenders' wrongful conduct as the dominant cause of the pursuers' loss. Reference was made to the analysis of global claims in John Doyle Construction Ltd v Laing Management (Scotland) Ltd, 2004 SC 713. On the evidence, the pursuers submitted, there was no basis for holding that the pursuers' decline in sales was caused to any significant degree by anything other than the defenders' wrongful conduct. In particular, there was no basis for saying that it was caused to a material extent by what Mr Overd in his report referred to as "merger" or "acquisition" effects: the loss of sales in consequence of a merger or the acquisition of a business.

[67] In my opinion the pursuers' analysis is broadly correct. Extensive evidence, reviewed below, was led which suggested that the defenders' conduct was likely to have had an impact on sales of Gemini board in the market, both to immediate customers, who are predominantly merchants, and to their customers, printers and end users. No witness, however, indicated that any damage was done to the Gemini brand as a result of anything in the nature of "merger" or acquisition" effects. (The present transaction was not a merger but the acquisition of certain intellectual property rights, notably the Gemini brand and customer base, and consequently I will in future refer to acquisition effects. These are discussed from an economic standpoint below at paragraph [217] onwards). Although many of the witnesses gave evidence about how the brand was likely to be damaged and was perceived to be damaged by the supply of large quantities of defective product and the behaviour of the defenders to customers, little attempt was made to suggest that a substantial reason for loss of sales was something quite different, the fact that a different company was producing Gemini board.

[68] By way of example, Mr Tschoner, of IT Papier, gave evidence (written statement, paragraphs 42-44) that the supply of defective product caused doubts about the quality of Gemini and caused a fall in business which his company could not prevent. In cross-examination, Mr Tschoner was asked (3 November, 2.45) about his knowledge as to the cessation of production at Carrongrove and the subsequent production of Gemini at the pursuers' mill. He could remember being aware, but not the details. He was then asked whether he told his customers about the fact that Gemini production was moving to the pursuers' mill. He replied that he would never tell customers when and how things were produced; the information would be on the product, not the producer. There had been discussions with customers as to the proposed change in Gemini specification. He was then asked about the report (production C702A) of a visit made by Marion Stodtmeister, a representative of the pursuers, to IT Papier in Vienna on 5 December 2005. In her report, Miss Stodtmeister recorded that two of IT Papier's managers in Vienna had expressed surprise when they realized that New Gemini was glossy and was identical to the Trucard stocked by a competitor. Mr Tschoner acknowledged the report, but stated that he had not been at the meeting. No attempt was made, however, to follow up the possibility that the factors mentioned in the report could have produced a significant fall in sales to IT Papier. Mr Hasecker, of Papier Union, also gave evidence that the pursuers have suffered damage (written statement, paragraphs 78-79, evidence on 4 November, 11.34). In cross-examination, however, it was merely put to him (4 November) 11.56) that there had been a change of producer and that the new product was different in appearance from the old product. Mr Hasecker replied that he had been aware of these had told his sales manager; he was unconcerned that the new product was glossier because he knew that the defenders had been looking for more gloss in the product. In addition, printing tests had been carried out. Other evidence, discussed below, indicated that those printing tests were carried out by several merchants and were found to be quite satisfactory: see paragraphs [148]-[150]). Mr Hasecker was subsequently asked (4 November, 12.10) whether there might be other reasons than defective product for a customer to change its version or product. He replied that normally there was not. Generally a printer does not change its merchant or its product, and it takes a year to take over a customer. That passage might be interpreted as an oblique reference to acquisition effects, but the point was not followed up, and it was not suggested to Mr Hasecker that they were a significant cause of the fall in Gemini sales following the acquisition.

[69] Apart from the lack of cross-examination, further factors tend to suggest that acquisition effects would have been minimal in the present case. First of all, the bulk of Gemini sales were to merchants, and it was the merchants' sales force that pushed the product. Those sales forces, of course, remained intact. Secondly, although there was a change in the specification of Gemini, a number of major customers had tested the product and indicated satisfaction with it; the relevant evidence is discussed at paragraphs [148]-[150]. Thirdly, evidence was led that demand for Gemini increased during the latter part of the Services Period to such an extent that the pursuers manufactured 150 tonnes of product for the defenders' customers and supplied it to them. This board was branded as Gemini, not New Gemini. It appears to have been accepted without complaint by customers. This in my view provides a strong indication that the difference between the two products was not regarded as relevant by printers and end users. Fourthly, evidence was led that the gloss on board was not generally relevant because the printer could achieve the effect that he wanted through the application of lacquer.

[70] In the foregoing circumstances, I do not think that there was any significant evidence that acquisition effects had any impact on the value of the Gemini brand. The situation might obviously have been otherwise if the pursuers had had a poor reputation in the market for quality or dealing with customers. No such suggestion was made, however, and the customers who gave evidence appeared to be very content with the pursuers' standards of quality and service. The defenders did not lead any evidence to suggest that acquisition effects had occurred; the one witness that the defenders had listed to speak to the paper and board industry, Dr Kellie, did not give evidence. Furthermore, Mr Overd, their economic expert, stated that any acquisition effects would be a matter for empirical evidence. He gave evidence that on occasion mergers failed, even if all the criteria for success were present, and he gave examples from his own experience. Dr Cuchra, the pursuers' economic expert, gave evidence, admittedly based on literature, on the criteria for a successful merger, and indicated that if these are satisfied it is likely but not inevitable that the merger will be successful. I discuss these views are greater length below (paragraph [217] onwards); for present purposes, it is sufficient to say that the criteria for a successful merger or acquisition appeared to be satisfied in the present case. The pursuers and the defenders had similar businesses, and there had been extensive planning for the acquisition. Moreover, the transaction was not a merger but the acquisition of the Gemini brand and associated intangible assets. In these circumstances I infer on a balance of probabilities that the present acquisition should have been successful and should not have displayed more than a minimal degree of acquisition effects.

[71] I accordingly conclude, for reasons discussed above and in paragraph [217] onwards below, that acquisition effects are unlikely to have been a significant cause of the severe drop in sales experienced by the pursuers after the end of the Services Period. Thus there is no basis for asserting that acquisition effects were a concurrent cause of damage to the intangible assets. To the extent that they may have existed and caused some limited amount of harm, I am satisfied that the defenders' breaches of contract are the dominant cause of the pursuers' loss. On that basis, the fact that the pursuers' claim is currently on a global basis is not relevant.

The first alleged breach of contract: supply of defective board
[72] The pursuers claim that the defenders are in breach of clauses 2.1(c), 2.1(e) and 5.1 as a result of the quality of manufacture of board supplied during the Services Period. In my opinion the evidence discussed below clearly establishes that the defenders are in breach of those clauses.

[73] The general quality standards that apply to the board, and the extent to which a certain level of defects is inevitable, are discussed above at paragraph [19] onwards. I am satisfied that during the Services Period the board manufactured by the defenders exhibited a scale of manufacturing faults that was well beyond both the normal level of such faults in the industry and the level of faults in previous Carrongrove production (which was in accordance with industry norms). The faults themselves varied substantially in nature. The most serious were delamination, picking, dirt, blade marks, surface scratches and mottle (written statement of Mr John Dougan, pages 5 onwards). Delamination occurs where the two layers of board are inadequately bonded during the papermaking process and they subsequently come apart. Picking occurs where there is a foreign body or contaminant present either in the body of the sheet, in the coating layer or under the coating on the surface of a sheet before the coating was applied. The contamination can be pulled out from the sheet as it passes through the printing press; the result is that the original sheet is left with a hole or indent. In addition, the pick often attaches itself to the blanket used in the printing press, and will affect every subsequent sheet until it is removed by washing the blanket. Dirt spots occur where there is contamination within or on the surface of the sheet. Blade marks are caused by debris which is trapped under the blade during manufacture. Scratch marks are caused by debris getting onto the rolls of card during the manufacturing process. Mottle is an area giving a cloudy or uneven appearance, and can result from a number of causes. Examples of all of these were available among the productions. Thus examples were available of delamination on telephone cards (12-041/05), picking (12-075/05, 12-308/05), delamination generally (12-115/05, 12‑135/05, 12-155/05, 12-319/05, 12-349/05), dirt (12-156/05), and blade scores (12 376/05). All of these were spoken to by Mr Sinclair (30 October, 12.35). A further example was a chocolate box manufactured for Tesco by a printer named Meulemans (12-074/05), which exhibited both delamination and picking (5 November, 2.47).

Statistical Evidence

[74] The claims made in respect of defective board produced during the Services Period are set out in a spreadsheet (productions, L3277-3288; agreed in paragraph 2 of the parties' joint minute and spoken to by Mr Sinclair on 30 October 2009 at 11.33). This discloses that approximately 250 claims were settled and another 50 were not accepted. It further indicates the customer affected, the nature of the defect and the defenders' position in relation to the sum claimed by the customer. The total value of claims is stated on page L3287. The total amount adopted in the summons, which is the sum of the claims accepted, is £593,128.62. Of that sum, £95,880.33 had been paid by the defenders, which leaves a balance outstanding of £497,248.29. Of the total sum of £593,128.62, £326,043.02 related to the value of defective board and £267,085.60 related to consequential loss. The complaints in respect of board manufactured at Carrongrove are also set out in a further production (tables at L3267-3276, spoken to by Mr Sinclair on 4 November 2009 at 3.25). The tables set out Carrongrove production runs during the Services Period by date of manufacture, and indicate those which resulted in complaints, delamination and other complaints being marked separately. The increase in the number of complaints is very striking, especially in the period from 28 October 2005 onwards. Nevertheless, a substantial numbers of complaints arose from production in the period from 12 October to 21 October, and frequent complaints arose in respect of manufacture during the earlier part of the Services Period.

[75] A comparison with the previous level of complaints is seen in the bar chart at L3290, which covers product manufactured during individual months from June 2004 to November 2005. In June and July 2004 fewer than 10 complaints were received. In August and September 2004 complaints ran between 10 and 20. In October and November 2004 approximately 30 complaints were received in each month. During the period from December 2004 to April 2005 approximately 40 complaints were received in each month. In May 2005 slightly over 60 complaints were received, but this fell back to approximately 50 in June and 35 in July. In August 2005 complaints increased to approximately 45, in September to 90 and in October to 105. Approximately 10 were received in respect of production during November 2005, but production in fact stopped close to the start of that month. Thus it can be seen that a striking increase in complaints occurred in respect of production during September and October 2005.

[76] Those figures also represent a striking difference from the level of complaints prior to June 2005. The defenders' normal customer complaints statistics at that time were reasonable and in accordance with industry norms (Mr Sinclair's written statement, paragraph 64). The relevant figures are set out in production A260, which was part of the information made available in the defenders' data room. This document shows the value of credit notes issued in respect of customer complaints during the period from the first quarter of 2003 to the first quarter of 2005. The complaints are broken down into specific categories. The total sums allowed in respect of complaints in 2003 amounted to £384,510; in 2004 to £406,314; and in the first quarter of 2005 to £119,548. Of those complaints, those relating to delamination amounted to £14,762 in 2003; £3,028 in 2004, and zero in the first quarter of 2005. These figures form a very striking comparison with complaints for production during the Services Period. During that period, which lasted five months, total complaints came to £593,128.62, which represents an annual figure of more than £1.4 million. That is approximately 3 1/2 times the level of complaints previously exhibited. I consider that difference to be clearly significant, and sufficient of itself to demonstrate a breach of contract. The main increase related to claims for delamination, where complaints went up from very low levels in 2003, 2004 and early 2005 to enormous levels towards the end of the Services Period.

[77] The documentary evidence in the above productions was fully supported by evidence given by the witnesses. Thus Mr Parr in cross-examination (29 October, 10.09) was asked whether delamination was concentrated in production at the end of the Services Period, between 29 October and 3 November 2005, but he replied that, although there was a concentration there, delamination had been a feature throughout the whole period. He went on to refer to a range of specific claims by customers such as BemroseBooth, McNaughton and Papier Union. In re-examination (29 October, 2.11) he referred to a "multitude of complaints" from customers such as BemroseBooth, McNaughton, Papier Union and Scientific Games International in respect of goods produced during the Services Period; those complaints were "far higher than normal".

[78] Mr Sinclair, who was the director of the pursuers predominantly concerned with sales and marketing, referred to the level of complaints at some length in his written statement. The complaints in excess of £1,000 are summarized at paragraphs 129, 166, 199, 268, 307, 331 and 354. The tables in those paragraphs set out the customers affected, the amount eventually paid out on each claim, the date the claim was raised and the defect in each case. The dates of the claims range from 13 October 2005 to 26 May 2006; the delay with the later claims was due to the fact that stocks of paper were not used immediately they were manufactured but might be retained for some months before they were sent to a printer. A large number of the defenders' Gemini customers were involved. The value of the individual claims ranged from £1,000 at the lower end to much higher figures. To give an example of the claims received, it is perhaps sufficient to state the instances towards the upper end of the range:

Meulemans	£20,700	1 December 2005	Delamination
BemroseBooth	£39,100	6 December 2005	Delamination
Papier Union	£27,500	23 December 2005	Picking
Scientific Games	£24,800	December 2005	Delamination
Scientific Games	£47,100	December 2005	Delamination
Papier Union	£13,400	December 2005	Delaminating stock
Schneidersoehne	£10,500	11 January 2006	Delamination
Schneidersoehne	£8,000	16 January 2006	Delamination
Moorman Karton	£8,800	6 February 2006	Dirt
Papier Union	£11,000	7 March 2006	Picking
Schneidersoehne	£14,300	10 March 2006	Delamination
Schneidersoehne	£8,900	14 March 2006	Delamination

I should observe that the complaints were numerous; thus the dramatic increase in complaints described in paragraphs [74]-[76] was not caused by a few rogue examples, but rather related to the whole process of production at Carrongrove during the Services Period.

Witnesses' evidence

[79] Mr Sinclair stated (paragraphs 146, 162) that the defects in Carrongrove production during the Services Period went beyond normal mill defects. Two issues seemed to arise. First, during the last two weeks or so of the Services Period a very high level of delamination occurred. Secondly, during the whole period there had been an increase in the number of complaints, including complaints such as picking and dirt; this suggested that quality control had not been maintained. A number of Gemini customers had asked for the recall of product held in their warehouses, or were considering recall; this applied to Papier Union, MAP Austria and Schneidersoehne (paragraph 161). Mr Sinclair was also concerned at the effect that the number of complaints would have on Gemini's sales, since repeated quality issues have an effect on end customers. He stated (paragraph 181) of that in his experience merchants who have concerns about the quality of a product stop promoting the product so enthusiastically, because their sales teams do not want to invite difficulties with end customers by risking another complaint. Mr Sinclair further indicated (paragraph 130) that the pursuers' own service to customers was affected by the level of complaints. Because of the number of complaints the pursuers had to break off their usual manufacturing process to replace faulty Carrongrove orders. These required to be processed urgently, and the result was that non-urgent orders were pushed back. That in turn affected delivery times to the pursuers' customers, including Gemini customers that had been acquired from the defenders.

[80] In his oral evidence Mr Sinclair was referred at some length to documents (L3277) bearing on the complaints made by Gemini customers about the quality of production during the Services Period (30 October, 11.33 onwards). He summed up this part of his evidence by stating (30 October, 12.24) that the complaints were high in number and cost. They were "hugely higher" than the information that had been available in the defenders' data room. The only rational explanation was a failure to maintain quality control during the Services Period. On the basis of the evidence of individual complaints, I am of opinion that that assertion was plainly justified. Mr Sinclair also touched on the particular significance of customer complaints in the board industry. He stated (30 October, 11.48) that it was apparent that customers had lost faith in the product. If that happened, the merchants' sales force would be nervous about selling Gemini. Printers would be reluctant to buy because of past complaints, and in that event the merchants would not want to push the product or even talk about it.

[81] Mr Sinclair's views were supported by the evidence of Gemini customers. Mr Ludger Hasecker, the head of procurement at Papier Union, a very large German paper merchant, stated (4 November, 10.25) that a merchant's sales team will be more reluctant to push a product where they do not trust the product, believing that it will result in complaints or where they feel that the quality of a product is at a disadvantage compared with other products. If a large number of complaints appear suddenly, it is essential to go to the supplier to consider what the problem is. Mr Hasecker had never had a quality problem on this scale apart from the incident involving the defenders. He further expressed the view (4 November, 10.40) that in view of the large number of complaints, in excess of the historical trend, problems must have arisen in production or quality management. Mr Christoph Tschoner (3 November, 11.25) was asked about paragraph 21 of his written statement, in which he stated that the levels of complaints on Gemini production during the Services Period were unacceptably high; every third stock delivery seemed to involve a complaint. Mr Tschoner stated that complaints had risen to an extreme degree. Before June 2005 things were normal; there were complaints, but not in this accumulated manner, which was not normal. Mr Swain of McNaughton stated (written statement, paragraph 27; evidence on 4 November, 2.33) that his company had lost confidence in Gemini stock, and did not want further arguments about it. He further expressed the view that in his opinion, considering the volume of complaints in lat 2005 and early 2006, quality control standards had slipped.

[82] Mr Roland MacLeod, who was the manager of the Carrongrove Mill prior to its closure, agreed with the pursuers' directors that the level of complaints arising from production during the Services Period was higher than would normally be expected. Thus he stated (6 November, 11.35, under reference to document D1083) that the level of claims was "higher than previously"; in particular, he did not expect delamination, and certainly not at the level referred to in the production. He further accepted (6 November, 11.49) that a large number of customer complaints can cause damage, although he pointed out that good handling can offset such damage. He indicated (6 November, 11.54) that the complaints were a serious problem for Carrongrove, and (12.04) that few complaints had been received in the past because the tests at Carrongrove had been adequate to spot problems during the manufacturing process. In relation to the Carrongrove production at the end of the Services Period, however, he agreed (12.32) that the last 135 tonnes were certainly not of merchantable quality, and that if the product were liable to delamination it would not be fit for purpose. By way of explanation, Mr MacLeod stated (written statement, paragraphs 13-15) that during the Services Period staff morale at Carrongrove was very low; employees were "very upset and distracted". Mr Ronald Law, who had been sales and marketing manager at Carrongrove, agreed that the level of complaints from November 2005 onwards made it clear that something had gone wrong at the end of production. The number of complaints was considerably more than the defenders had normally experienced, and clearly something in the board manufacturing process had gone wrong (statement, paragraph 24; 6 November, 3.05). It was submitted for the defenders that during the Services Period the defenders ran the Carrongrove Mill as normal. For the reasons stated in this paragraph, I do not accept that submission.

[83] Mr Gary Wallace, who had been the pursuers' finance director at the time of the acquisition, had examined the documents in the defenders' data room in North Queensferry. He was asked in examination in chief (12 November, 2.26) whether a point had come when the pursuers had decided that events in the Services Period and thereafter had damaged the Gemini brand. He replied in the affirmative. In relation to complaints, the data room had showed that the complaints paid out by Inveresk in 2003 and 2004 came to £33,000 per month. It takes two to three months for complaints to work through the system. Consequently, in December 2005 and January 2006 he would have expected customer complaints to amount to £60-70,000. In fact, following the Services Agreement, the pursuers settled £600,000, almost 10 times as much (12 November, 2.36). Complaints were very regular in the period from December to February. The complaints related to a number of issues. Delamination had occurred in the last period of the defenders' production, but throughout the period a lot of complaints related to picking and surface debris. In relation to product manufactured during the Services Period the defenders had settled 44 claims on picking and the pursuers settled a further 54, 98 in total. The defenders sold just over 15,000 tonnes in that period. Thus picking complaints, expressed as complaints per thousand tonnes, came at a rate of 6.5 per 1,000 tonnes. The pursuers' own production gives rise to some picking complaints, but these are normally at a rate of 0.446%. That meant that the picking complaints relating to the defenders' production during the Services Period were at 14 times the pursuers' standard rate. Mr Wallace went on to discuss the increase in complaints for two major customers, Schneidersoehne and Papier Union; during the first six months of 2006 sales to the former company had fallen by 32% and to the latter company by 20%. During the same period, according to survey statistics, the German market grew by 7.25%.

[84] Mr Wallace was then asked (2.46) whether it was possible to draw any conclusion regarding quality control by the defenders during the Services Period. He replied that, with hindsight, the defenders' operators had not paid much attention to the quality of product and had allowed paper to go out which would under normal circumstances have been picked up by their own quality assurance testing. He could only assume that they had made the product and then let it go without testing. He was asked what would happen to the pursuers' board business if there normal rate of complaints were the same as that for production during the Services Period, and he replied that customers would quickly look for alternatives. Mr Wallace thought that this would massively damage the brand. The key point was that sales were made to merchants, who resold the product on to end users. If the merchant is scared of losing business he will offer an alternative brand. In that way the merchant retains the business but the mill loses it, to an alternative mill. If similar problems occur over and over again that will result in loss of business, irrespective of how good the relationship is between the mill and the merchant.

Justification for complaints

[85] Mr John Dougan, the pursuers' technical services manager, had been responsible at the pursuers' end for settling customer claims arising from production during the Services Period. He gave evidence (18 November, 11.30 onwards and 19 November, until 12.48, under reference to his written statement and to productions E1598 and E1324 and a number of individual complaint files) regarding the range and extent of customer claims. He stated that until 16 January 2006 the defenders, acting through their director, Roland MacLeod, had authorized him to settle customer claims for board and consequential losses, and to make commercial (compromise) settlements where appropriate. Consequently he was able to speak to the individual claims in detail. The following is a brief summary of his evidence.

[86] Mr Dougan described the processes to which board is typically subjected (statement, page 4). Printing may involve the application of numerous layers of ink. Some of the board produced during the Services Periods was turned into small cards, such as telephone cards and scratch cards, which might receive 16 layers of paint and varnish for security purposes. Hundreds of these cards could be cut from one sheet; thus if a few were damaged the entire batch had to be rerun. After printing the board was often put through a number of different finishing processes; these included turning board into brochure covers, boxes and folders. The board for these products has to be creased, cut to shape, folded and assembled. It might also require to be laminated, embossed, mounted or glued. The latter processes (known as "converting") can be costly, and faults in board are sometimes not apparent until these later processes take place. Thus delamination may only manifest itself in the end product, following cutting or folding. If that happens, the customer's claim is likely to include the cost of repeating all of the printing and finishing processes.

[87] Mr Dougan then referred to the product specifications for the Gemini board produced by the defenders at Carrongrove and by the pursuers in Markinch. These were similar but not identical. He further described the way in which the two layers of board are fixed together using starch. The ability of the sheets to remain fixed depends on the ply bond strength, and if that is defective delamination may occur. Tests are regularly carried out to check ply bond strength. In relation to the defenders' production during the Services Period, Mr Dougan summarized the position as follows (written statement, page 5):

"In going through the many complaints I have inspected hundreds of samples of the board produced by Inveresk at Carrongrove Mill between 9 June 2005 and 8 November 2005. It is clear from these complaint samples that some of the board produced neither met the standards set out in their own Specification Data Sheets nor was fit for purpose.

The board clearly had failed to meet satisfactory quality standards of a competent manufacturer".

In evidence (18 November, 10.44) he stated that the two main defects were picking and delamination, and it was very unusual to get so many complaints. I should record at this point that I found Mr Dougan's evidence about the various complaints to be very helpful; I specifically noted that he clearly knew his job and that his evidence was clear and consistent. In addition, I should observe that the foregoing evidence was not challenged in cross-examination.

[88] In his written statement (pages 16-123) Mr Dougan considered the various individual complaints that were made about production at Carrongrove during the Services Period. He spoke to a substantial number of these in his evidence (18 November, 11.28-19 November, 12.50). I do not propose to consider this evidence in detail. It is sufficient to note that in every case Mr Dougan was able to speak to the specific customer complaint, the steps taken to investigate it and the conclusion that was reached. In many cases the investigation was carried out by Mr James Couper, the defenders quality manager; in particular, until early 2006 nearly all complaints were handled by Mr Couper at Carrongrove. Nevertheless Mr Dougan had discussed complaints with him and had considered the documentary evidence in detail. After matters became more contentious in early 2006 Mr Dougan was personally involved with complaints. It is sufficient at this stage to note that I accept his evidence on all of these complaints, as set out in his written statement.

[89] Mr Dougan further gave evidence about taking samples from reels of board taken over by the pursuers from the defenders of the end of the Services Period and testing those samples for bond adhesion (19 November, 12.52). The result of the tests was that the bond adhesion was low, and sometimes very low. Those reels were sent back to Carrongrove as waste. Mr Dougan's general conclusion regarding production during the Services Period (19 November, 12.57) was that the problems showed a major delamination problem, which was quite apparent after November 2005. The pursuers had never seen anything like that. At this point I noted that it was clear from Mr Dougan's demeanour that he was being honest and careful in his evidence.

[90] Further detailed evidence was given regarding the testing of board produced at Carrongrove during the Services Period. The pursuers carried out tests for a measure known as Scott Bond, which measures the strength of adhesion between the two plies of the board; a measure of 140 newtons is regarded as safe, and below that is dangerous (29 October, 3.22). According to that criterion, the testing by the pursuers revealed that a significant part of the defenders' production during the Services Period, especially at the latter end, was inadequate. The documentary evidence was considered at some length by Mr Sinclair (30 October, 12.46, 1.59 onwards), and it fully supported that conclusion. Evidence was available in relation to a particular complaint made by an Austrian printer, Dinkhauser; they were a customer of the Austrian merchant, IT Papier; IT Papier took approximately 1,000 tonnes of product each year, and Dinkhauser accounted for 500 tonnes of that. A large delivery of board to Dinkhauser had been rejected, and when it was tested by the pursuers it produced Scott bond strength of 108, as against a standard figure for Gemini of 150 or 160. Mr Sinclair's reaction at the time was that the board was faulty and that the problem with Dinkhauser had to be resolved. (The test results for the Dinkhauser claim are at production C732. The claim resulted in extensive correspondence and a site visit to Dinkhauser on 8 February 2006. It was eventually settled on a commercial basis; the pursuers supplied Dinkhauser with 50 tonnes of product free of charge). In his evidence Mr Dougan also commented on this claim (18 November, 10.55). He described the results of the Scott Bond tests as "very variable", and that a lot of the Dinkhauser product was not fit for the purpose for which the board was intended; this was the production of brochures for a retailer of wooden flooring. This view was generally supported by correspondence that passed between Mr Sinclair and Mr MacLeod on 7 December 2005 (production C729-730), where it was stated that most of the material supplied met required standards but some of it showed very low values. Finally, Mr Parr gave evidence (written statement, paragraph 60; 27 October, 12.48) that it had been contemplated in the Services Agreement that the pursuers might take over any unsold product left with the defenders at the end of the Services Period. At the end of the Services Period some board was unavailable, in the form of a buffer stock of 130 tonnes. It was found, however, that that board was not of merchantable quality, and it was returned to the defenders, who tested it and then credited the pursuers with the amount that had been paid for it. Thus that stock was found defective.

[91] Evidence was also available as to testing by the defenders of stock manufactured by them during the Services Period. Mr Roland MacLeod gave evidence (6 November, 12.00 onwards) in which he spoke to testing of the defenders product by PIRA, the Paper Industry Research Association. This revealed a number of issues with the strength of the ply bond in relation to board produced during the Services Period. Mr MacLeod accepted that a large proportion of delamination complaints had been received in relation to board produced during the Services Period, and he accepted that that was an indication of low bond strength. Documentary evidence was also available (productions at E1243-1249) that indicated that the defenders had reviewed the delamination problem at Carrongrove; the document in question was identified by Mr Law as produced by either Ben Murphy or Gordon Thomson of the defenders (6 November, 3.11). Mr Law stated that the cause of the problem was never exactly identified. It had been impossible to establish any pattern to it, but that was a cause of concern in itself.

Conclusions on level of complaints

[92] In the light of all of the foregoing evidence, I conclude that the level of defective board produced by the defenders during the Services Period was greatly above industry norms. The precise causes of the problem were never fully explained. At one point the defenders suggested that sabotage by their employees might be a reason, but no evidence was led in support of such a contention and I have no hesitation in rejecting it. It seems clear that the employees at Carrongrove were treated badly at the time when the decision was made to close the mill; even senior employees such as Mr MacLeod and Mr Law were not told until the last minute, and all of the Carrongrove employees lost their jobs as a result of the closure. Consequently it would not be surprising if many of those employees were seriously disgruntled and did not follow proper working procedures. There was no direct evidence of that, however, and it is not necessary for present purposes to reach any conclusion as to the reasons for the high level of defective product. The fact is that product was defective to an extent that was manifestly unacceptable. I accordingly conclude that the defenders were in breach of contract.

[93] At this point I should note a submission for the defenders that in the period prior to the conclusion of the agreement the incidence of complaints about the defenders' board had varied from time to time. That is true that so far as it goes, but I am nevertheless satisfied that the level of complaints on board originating during the Services Period was greatly above any previous norm. Reliance was placed in particular on a statement that for the first five months of 2005 the total paid by the defenders to Schneidersoehne in respect of complaints was approximately £125,000, giving a monthly average of £25,000. This, it was said, had been masked in the evidence given by Mr Wallace and others about complaints. This matter was raised in re-examination of Mr Dougan. The documentation made available to Oxera (file 20, volume 2, number 128) contained a reference to a payment of £80,000 to Schneidersoehne in the early part of 2005. In the information made available to the pursuers prior to the transaction, however, there was no entry corresponding to this payment (production A260). In fact, as Mr Dougan indicated under reference to the Oxera file, the basis for the complaint was described as a "shade difference". What had happened was that the customer had picked the wrong grade of board. The board itself was within acceptable tolerances, but despite that the complaint had been paid. In my view it is clear that this was not a complaint based on defective manufacture but related to something else entirely.

[94] A further submission for the defenders was that, because a "background level" of defects existed, the faults themselves could not be a breach of contract. For defects to constitute a breach of contract some threshold would have to be crossed. Such a threshold had not, however, been identified by the pursuers. That is true so far as it goes. The fact that some defects are inevitable in the manufacture of board means that a normal level of defects cannot amount to a breach of contract; this matter is discussed above at paragraph [52]. If the level of defects is well above the norm, however, there is in my opinion a clear breach of contract. It is no doubt true that the precise dividing line is difficult to identify, and borderline cases may clearly exist. Nevertheless, in the present case I am satisfied that the level of defects was greatly above the norm. That is sufficient to establish a breach of contract. For this purpose it is not necessary to determine where the dividing line might lie; it is certainly well below the level of defects that was exhibited in the present case. Direct evidence that the level of complaints was well above the previous norm was available from Mr MacLeod and Mr Dougan, and it is also apparent in e-mails sent by Mr Walker (productions D1081, 1083 and 1169). In production D1083, sent by Mr Walker to Mr MacLeod on 16 January 2006, he stated:

"I have now instructed our finance team to carry out an internal audit to establish what I have been looking for throughout this dreadful period which is an estimate of potential exposure over the year-end and for which I hold you and your management team responsible".

In production D1081, sent to Mr MacLeod on 17 January 2006 Mr Walker stated:

"For my part I am now talking to our legal advisers as to the appropriateness of taking legal action against those responsible for this disaster which is man-made".

That e-mail also contained the statement:

"...your team is up to its neck in breaches of fiduciary duty particularly if it turns out that a deliberate act of commercial sabotage has taken place".

In the third of these e-mails, production D1169, sent by Mr Walker to Mr Parr on 20 January 2006, it was stated:

"Not in my wildest dreams did I imagine that they were this number of claims and for some reason neither Gordon [Thomson] nor I have been properly informed.

...

Much will depend on the validity or otherwise of these claims given that they are dramatically worse than any claims experience for years".

It is fair to record that in the last of these e-mails Mr Walker was advancing the view that, despite the large number of complaints, there should be no long-term damage to the Gemini brand. Nevertheless, for reasons discussed below, I reject this view.

[95] Finally, I should record that the foregoing evidence relating to the level of faults in production at Carrongrove during the Services Period went largely unchallenged. In those circumstances I am entitled to draw the most favourable inferences for the pursuers from the evidence of their witnesses. It seems to me that a breach of clauses 2.1(c), 2.1(e) and 5.1 of the Services Agreement is clearly established.

The second alleged breach of contract: defenders' dealings with Gemini customers

[96] The pursuers further claim that, after complaints began to emerge from Gemini customers, the defenders treated those customers in a manner that amounted to a breach of 14.6 and 14.7 of the Services Agreement and clause 15.4 of the Asset Purchase Agreement. I am quite satisfied that this breach of contract has been established on the evidence. Two aspects of the defenders behaviour are relevant: first, the manner in which the defenders dealt with complaints by customers, and secondly, the delay in settling customers' claims.

Manner of dealing with complaints

[97] Evidence on this matter was led from a number of witnesses, notably Mr Parr, Mr Sinclair, Mr Tschoner, Mr Hasecker, Mr Rigg, Mr Swain, Mr MacLeod, Mr Wallace and Mr Milne. Their evidence was fully supported by a substantial number of documentary productions, including letters written by the defenders to customers in highly intemperate terms. In my opinion the evidence established that the defenders handled customer complaints in a manner that was likely to damage the relationship with Gemini customers, and thereby to damage the value of the Gemini brand. Moreover, on any reasonable basis, it must have been obvious that this was the likely outcome of their conduct. Indeed, Mr MacLeod, the manager of Carrongrove Mill, who impressed me in general as a moderate and careful witness, was critical of the terms in which letters from the defenders were framed (6 November, 10.58 onwards).

[98] All the witnesses who gave evidence on the matter were agreed that customer relations are of critical importance in the paper and board industry, and I did not understand this point to be seriously disputed. The reason is that, because a certain amount of defective product is inevitable, well-founded customer claims are inevitable. Customers expect those claims to be met because the product in question is, by definition, not of satisfactory quality. It is very obvious that, in dealing with claims of this nature, maintaining good customer relations is of paramount importance because paper mills will inevitably, for obvious commercial reasons, want to agree such claims with a minimum of trouble and disruption. Likewise, customers, whether merchants or printers, want well-founded claims to be met with a minimum of inconvenience, and if they are not dealt with in this way their business is liable to move elsewhere.

[99] Both Mr Parr and Mr Sinclair gave evidence regarding the defenders' treatment of Gemini customers, making extensive reference to the documentary productions. I intend to narrate Mr Parr's account, which was supported in all material respects by Mr Sinclair, and to supplement it where appropriate by reference to Mr Sinclair's evidence. Mr Parr began as part of his evidence by referring (statement, paragraphs 67, 68, 71 and 72; 27 October, 2.41 onwards) to the minutes of board meetings of the defenders dated 16 and 22 December 2005, at which quality complaints were clearly highlighted as a problem. At the latter meeting, it was agreed that any agreement or credit notes issued to customers required the authorization of either Mr Walker or Mr Thompson, and that any claims for consequential losses would not be entertained. In fact the payment of consequential losses is an invariable practice in the paper and board industry, and there was very strong evidence that the defenders had consistently paid consequential losses caused by the supply of defective board. In January 2006 Mr Parr was becoming concerned at the effect that defective production was having on the Gemini brand (statement, paragraph 82) and he raised the matter with Mr Walker and Mr Thompson in an e-mail of 18 January. Meanwhile, however, the complaint made by Dinkhauser, IT Papier's customer, was under consideration, and the defenders rejected this in a letter of 19 January (sent on 20 January: production C1126-1127). The final paragraph of the letter was in the following terms:

"We therefore reject your claim in total which is viewed as opportunistic and cynical at the time that this business is being transferred to Tullis Russell. Accordingly all our rights and remedies continue to be fully reserved at this time".

Mr Parr stated that he was "horrified" by the letter; he had never written to a customer in such terms, and the matter was especially serious because it was clear that there were significant delamination complaints from Dinkhauser, which were the subject of tests by the defenders. There had never been any indication that the defenders had dealt with customers in this way previously. Although the letter of 19 January went out in Mr MacLeod's name, the draft (production C1125) indicated that the final paragraph had been inserted by Mr Walker. I am bound to say that I find the tone of the letter of 19 January appalling. IT Papier was a major Gemini customer, and Dinkhauser was a major customer of IT Papier with a justified complaint. In the circumstances there could be no possible justification for writing in the terms that were used.

[100] At this point I should note that I was invited by the defenders to find that Dinkhauser's complaint was not justified; in the light of that, the claim made by them could reasonably be described as "opportunistic and cynical". I decline to make such a finding. I accept that the original claim, for the whole cost of the material supplied to Dinkhauser, was greater than justified, because a substantial part of the material was of proper quality. Nevertheless, a substantial part was not; the relevant evidence is discussed above at paragraph [90]. On that basis it could not be said that the claim was without merit. In the event it was the subject of prolonged negotiation, and ultimately a commercial settlement was achieved. Several of the witnesses made it clear that it is common for customer complaints to be the subject of commercial settlement in this way. Against that background, I can see no possible justification for the tone of Mr Walker's e-mail.

[101] Mr Walker then replied to Mr Parr's e-mail of 18 January in an e-mail received in the late afternoon of 20 January (production C1169; statement, paragraph 90; 27 October, 3.46). Mr Walker stated that he was unaware of the extent of the complaints that have been received from customers, and was concerned that £48,125.22 had been credited to customers by the pursuers without sanction from the defenders. He then continued:

"Not in my wildest dreams did I imagine there were this number of claims and for some reason neither Gordon [Thomson] nor I have been properly informed. That said I have grave suspicions that a number of these claims are complaints of convenience surrounding the transfer of the business and the difficulties faced by the market".

In his evidence Mr Parr commented that Mr Walker must have been aware that there were significant problems with faulty product, and that the result of the letter from the defenders to IT Papier was that the pursuers had to work "desperately hard" to defuse the situation. Mr Parr replied to Mr Walker by e-mail of 23 January (production D1174), in which he expressed astonishment that Mr Walker and Mr Thomson were unaware of the extent of the quality issues and drew attention to the effect that these were likely to have on the Gemini brand. He also expressed shock at the content of the letter regarding the Dinkhauser claim, pointing out that "such provocative language will almost certainly result in a loss of all future business on Gemini".

[102] Mr Walker replied by a further e-mail of 23 January (production D1186), in which he suggested that other employees of the defenders, notably Mr MacLeod and Mr Law, had not followed proper procedures regarding credit notes to customers who made claims, and further suggested that the pursuers might not be wholly objective in settling claims given their natural desire to retain customers. Mr Parr rejected those claims, in an e-mail of 24 January and in evidence. Since I formed a favourable view of his credibility and reliability and did not hear any contrary evidence, I consider that he was correct in doing so. Mr Walker sent a further e-mail to the pursuers on 1 February 2006 (production E1264). In this he stated that the defenders would respect their terms and conditions of sale, which clearly indicated that they would not pay for consequential losses. He stated that the defenders' board have lost confidence in those dealing with the claims (who included Mr MacLeod); as a result all credit notes would need to be signed off by the defenders' finance director. Mr Walker indicated that he was not prepared to sanction the involvement of Mr Couper in the settlement of claims (Mr Couper having been taken on by the pursuers to process claims arising out of the Services Period). In relation to claims examined by the pursuers, Mr Walker insisted that those be processed in accordance with the defenders' stated procedures; thus every claim had to be processed and validated to his satisfaction. He rejected the level of claims that had been suggested by the pursuers, and stated these had been "inflated" by Dinkhauser and others in a manner which he described as "opportunistic and unsustainable". Nothing must be settled with ModoVanGelder, Meulemans or Papyrus without prior agreement from Mr Thomson or himself. He concluded by saying that he was furious that the defenders should encounter problems which were being "dramatized for effect" and were in reality a small part of the business. He suggested that what was involved was opportunism at a time of business change. Mr Parr rejected these contentions (28 October, 10.30), and pointed out that a significant part of the business was affected by claims. I accept his evidence on this matter.

[103] Mr Parr went on to discuss the position of Papier Union, whose complaints about Gemini had increased dramatically in respect of production during the Services Period; the number of complaints increased by 258% and the value of complaints increased by 540%. Mr Hasecker, the head of procurement, had expressed concern because he was holding 300 tonnes of stock and had doubts about its quality; consequently he was worried that he would face claims when he sold that stock on to customers. He felt that the defenders were not helping with his problem (production E1419).

[104] A further threatening letter, written by Mr Walker, was sent by the defenders to BemroseBooth on 23 February (production E1459). This included the following passage:

"My Board takes a very serious view in relation to claims which are not made with good faith and in this connection we must for the record express our disappointment that after working together for so long you have been unable to support your claim in a fair and professional manner. My Chief Executive will be in touch with your CEO in due course".

Mr Parr's comment on this letter was that it contained threats which could only damage goodwill and alienate customers from the Gemini brand (28 October, 11.15). I agree with that view.

[105] Also on 23 February, Mr Walker wrote to Mr Hasecker at Paiper Union stating that the latter company's complaints showed "strange anomalies which require further investigation" (production E1460). As a result, every complaint would have to be reviewed. Mr Hasecker had written to the defenders suggesting that they should recall the 300 tonnes of board that Papier Union had in stock. Mr Walker replied that this was not necessary as the intermittent fault that had occurred in the last days or weeks of production could be isolated to specific production runs. He continued:

"The suggestion of a recall is a complete exaggeration of the problem and out of step with reality. The stock you hold is of prime merchantable quality and when a problem does appear we will continue to stand behind the guarantees which have existed over a long period of time".

He continued by rejecting that there was any diminution of brand loyalty or a perceived loss of confidence. Mr Parr rejected the suggestion that defective board could be isolated to specific production runs; the pursuers had been trying unsuccessfully to obtain that information from the defenders. He stated that the letter could only damage goodwill and alienate customers from the Gemini brand.

[105] Yet a further aggressive letter was written by Mr Walker on 23 February to Scientific Games International (production E1462). This was in similar terms to the letter to BemroseBooth, and contained a paragraph identical to that quoted above from that letter. Once again, this seems clearly to be calculated to antagonise an established Gemini customer. Still further correspondence took place with McNaughton at this stage (Mr Parr, written statement, paragraph 112; Mr Swain, written statement, paragraphs 29-30). Once again, this had the effect of antagonising the customer. In evidence, Mr Swain stated (4 November, 2.30) that he had not been treated in this way before, and that the implication was that he was lying.

[106] Evidence was led from representatives of Gemini customers in relation to correspondence with the defenders at this time. Mr Tschoner, of IT Papier, commented on an e-mail sent to that company on 19 January (production D1126), whose terms are quoted above at paragraph [99]. He described the letter as "not at all what we had been expecting" (statement, paragraph 29), and stated that "the tone of the response was a complete surprise". He went on (statement, paragraph 30):

"For me these are words you use to someone you dislike, not something you write to your merchant partner. This complaint was neither cynical nor opportunistic but a genuine complaint raised by a concerned customer of ours who received faulty board and suffered financial consequences as a result. I have never had a letter like that from any other manufacturer".

He repeated that view in his oral evidence (3 November, 2.06).

[107] Mr Hasecker commented on events surrounding the letter to Papier Union of 23 February (production E1460), quoted in paragraph [104] above. In his written statement (paragraphs 37-38) he stated that he had previously spoken by telephone to Mr Walker. He did not find him polite, and thought it clear that no understanding had been reached. He continued:

"Once Inveresk had shut down Carrongrove Mill there was no more constructive conversation with them. Inveresk stopped being interested in the product and seemed only concerned with their own financial position. They no longer had the desire to resolve problems. Our discussions were pointless".

In evidence (4 November, 11.02), he was asked about the reference in the letter of 23 February to the stock held by Papier Union being of "prime merchantable quality". He replied "I felt slightly mocked". When asked if that was a true statement, he replied "absolutely not". It was in fact quite clear that Mr Hasecker was correct about this. On 17 February Mr Walker had received a list from Mr Roland MacLeod showing that, in the period during which the defenders' product had shown "intermittent delamination", Papier Union had received 137 tonnes of stock (production E1377). If Mr Walker had received the list prepared by Mr MacLeod, which seems likely, I find it quite impossible to understand how he could have written the letter of 23 February in good faith. The two documents are completely inconsistent. In his evidence (6 November, 12.07), Mr MacLeod stated that he could not understand how Mr Walker had written such a letter.

[108] At this point I should note a submission made for the defenders that, because almost all the complaints referred to by Mr Hasecker were intimated after the end of the Services Period, it was the responsibility of the pursuers to deal with them. The pursuers, however, and in particular Mr Sinclair, provided active assistance to Papier Union in promoting their complaint, by drafting a letter for them. It is correct that Mr Sinclair had co-operated with Papier Union, but I do not think that he can be criticized on that account. By the time that occurred, it had become quite clear that a substantial amount of stock supplied to Papier Union was produced during a period when a very high incidence of defects was occurring. In the circumstances it is hardly surprising that Mr Sinclair would do his best to preserve the reputation of the Gemini brand with an important customer by adopting a mollifying attitude. In addition, by March 2006 the disputes between the parties had resulted in litigation because the systems adopted to deal with customer complaints had reached a chaotic state.

[109] Mr Adrian Rigg, of BemroseBooth, commented on the letter to that company of 23 February (production E1459, mentioned at paragraph [104] above). In evidence (4 November, 12.54) he stated that the letter was a threat, was very offensive, and indicated that he was not trusted. He stated that he had never been treated like that before, by Inveresk or anyone else. The supplier/customer relationship had changed completely; Inveresk had no further interest in BemroseBooth, and the relationship became adversarial, not a partnership. The letter had damaged the brand Gemini significantly. The latter statement was not challenged in cross-examination, and I accept it as correct. Mr Rigg replied to the letter of 23 February in an e-mail of the following day (production E1468). In this he stated:

"I have received your letter dated the 23/02/06 and must say we find the accusation of the claim not being made in good faith, unacceptable.

...

[Y]ou should note we find your accusation of lack of good faith (which we take as an inference of dishonesty), repugnant and our position will be robustly defended ".

The letter refuted the claim made in the letter of 23 February in forthright terms. BemroseBooth's claim was restated, and ultimately paid in full (Mr Rigg's written statement, paragraph 31, 34). I should observe that at the time of Mr Rigg's evidence I noted that I found him a fair and careful witness and that his evidence seemed reliable. Although I made no express note, I reached the same view on the other witnesses employed by Gemini customers.

[110] For the defenders it was submitted that only one complaint had been received from BemroseBooth, and that there was no evidence that the letter of 23 February had had any impact on purchases of Gemini by that company. Even before that letter was received Mr Rigg had indicated to Mr Parr that in future BemroseBooth "would source a different grade of SBS board". The production relied on to support this statement is D1103. In that production, however, Mr Parr, writing to Mr Walker and Mr Thomson, writes in the following terms:

"I am genuinely concerned that quality problems which may well have been isolated to a short period prior to closure have and are continuing to damage the Gemini brand. We are still not running at the level of Gemini business which we anticipated and certainly not at levels sufficient to repay the consideration value. We believe that this is not only due to a pre-take on stock build by these customers but rather down to these quality issues. This is supported by statements made by many of your old customers, the most recent of which was by Bemrose who have stated their intention to source a different grade because of quality and the treatment of their claim by Inveresk. Bemrose stated that while they accept the fact that Tullis Russell has done nothing wrong and that these quality issues are not connected with future supplies, they have nonetheless lost faith in the Gemini brand".

The indication in that e-mail is that the customer relationship with BemroseBooth was damaged, both by defective quality and by the manner in which Inveresk dealt with the complaint. For the defenders it was also suggested that the single supply of defective board to BemroseBooth would not constitute a breach of contract, in view of the fact that the manufacture of some defective board is inevitable. In my opinion this is a misreading of the breach of contract. The breach of contract relied upon by the pursuers is a breach of the defenders' contract with them, not with BemroseBooth, and the breach consists of the repeated supply of defective board to many customers at a rate that was well above the normal. The supply of defective board to BemroseBooth was part of that breach of contract. The defenders also relied on the fact that BemroseBooth continued to purchase Trucard from the pursuers. Nevertheless, it is clear that prior to the pursuers' acquisition of the Gemini brand they had sold Trucard to BemroseBooth, and those sales continued. It is impossible to infer from that that the Gemini business was not damaged.

[111] Finally, Mr Andrew Swain, of McNaughton, was asked in evidence for his impression of the way in which the defenders had dealt with complaints relating to production during the period from June to November 2005. He replied "Unprofessional". Before that, he had always found them very good although there might have been some disagreements.

[112] Mr Roland MacLeod was asked about the defenders' relations with customers (6 November, 10.53 onwards). He was asked if the ability to handle customer complaints was important to brand value, and replied that it was seen as important to customers. In effect, the mill undertook a guarantee for their product. In his experience that was not different from the industry norm. After certain further questioning, he was asked whether he would abuse customers, and replied that he did not understand the question; I noted that he was clearly surprised at the notion. He was then asked if he would call customers liars, and he replied that he would never do that. In relation to the expression "cynical and opportunistic", he stated that he would not call customers that to their face, although possibly to colleagues; it would not be commercially astute to do so. He also thought it very risky to call customers liars. All of that evidence seemed very obvious.

Delay and non-cooperation in settling claims
[113] Where a customer has a well founded complaint against a manufacturer, the practice in the paper and board industry is to pay the value of the board supplied, together with any consequential losses, within a reasonable time. Normally this is done by the issue of a credit note, which will be authorized by the quality control department of the manufacturer. All of the foregoing is perhaps obvious. Following the significant rise in the level of complaints resulting from production during the Services Period, however, the defenders delayed settlement of claims to a serious extent, and also failed to cooperate in providing the full information to the pursuers that was necessary for them to settle claims.

[114] Evidence on this matter was given by Mr Sinclair. In his written statement (paragraphs 213-216) he described the problems in general terms. Once the pursuers realized that there was a problem, the wanted to limit possible damage by identifying affected batches and letting customers know about them. The defenders did not, however, co-operate in providing such information. Mr Parr also dealt with these matters (written statement, paragraphs 111-112) as did Mr Wallace (written statement, paragraph 48 onwards). In evidence Mr Sinclair stated (30 October, 11.19) that, in cases where credit notes had been signed and authorized previously, the defenders were not doing so any more. Credits were not being sent to customers. Consequently customers became extremely angry and frustrated. Some had suggested holding back money from the pursuers. On being asked about the impact on the customer relationship and brand goodwill, Mr Sinclair commented that this was damaging both severely. Moreover, the defenders started to investigate complaints themselves and arranged meetings with customers. Customers became irritated by the delay in payment and in having to repeat points that they had made to the pursuers. There was confusion as to who was in charge.

[115] Mr Sinclair also gave evidence that Mr Walker had stated in correspondence with him in February 2006 that the defenders would deal with customer claims as they thought fit; the point had been repeated in a letter from the defenders' solicitors on 28 February (12 November, 11.09, under reference to productions E1455 and 1485). Mr Walker further stated that it was not appropriate that the pursuers should deal with customer claims. Thereafter the defenders did not keep the pursuers informed as to which credit notes they had issued to customers, even though the pursuers had asked the defenders for copies of credit notes so that the situation did not become even more confused. Mr Walker's e-mails to Mr Sinclair at this time amounted to a rejection of the protocol that the parties had entered into regarding the handling of customer claims, and I have little doubt that it is added to the confusion and delay regarding those claims.

[116] Mr Ronald Law, who had been responsible for sales and marketing at Carrongrove, gave important evidence on this matter. He stated (witness statement, paragraph 35; 6 November, 3.21) that once the major delamination issue became apparent the defenders' approach to customer complaints changed. They were instructed by Mr Walker to take a strong position against complaints. He supposed that this was to reduce the financial exposure to the defenders. From then on the defenders' response was stronger than normal, and stronger than probably was reasonable. There was also a delay in raising and issuing credit notes (paragraph 36), and Mr Walker had directed that no consequential loss was to be paid (6 November, 3.24). Mr Law had advised Mr Thomson and Mr Walker that the way that complaints were handled was essentially part of the brand (paragraph 39; 6 November, 3.26). If a customer bought a branded product, it expected full after sales service; that was crucial to the brand. He was asked what would happen if a mill refused to pay consequential loss suffered by the end user. He replied that he had always been told that a salesman can use good dispute handling to his advantage. If, however, delays and other problems arose, that would be to the disadvantage of the goodwill of the brand that the pursuers had purchased. Mr Law was then asked (3.30) about a letter sent to Mr Tschoner on 19 January 2006 (D1126). He stated that this related to what was perhaps Gemini's highest priced market, amounting to approximately 1,000 tonnes per annum. In that letter, on Mr Walker's instructions, IT Papier had been accused of making an "opportunistic and cynical" claim. Mr Law thought that that would have a very detrimental effect on the customer relationship, and would be likely to have a negative impact on the customer's desire to support and sell the brand. Mr Law went on to make the following statement (paragraphs 52 and 53):

"52. In my view, the nature and manner in which complaints were dealt with would have caused a drop in future sales. There is no way you would be able to defend the tremendous delays in the complaint response which would have damaged the customers' perception of the brand Gemini. I think that the rise in the level of product complaints and the manner in which these complaints were dealt with may well have dented the customer confidence going forward over a period of time especially from November 2005 onwards.

53. I am not surprised that over a 12 month period, not all sales transferred across. I would say that people's confidence in the brand was dented. It would certainly not have done them any good. As a sales guy, if you are sitting on a very expensive claim and the Mill rejects it, what do you do? If you had to negotiate a settlement, there is a good chance you will switch to alternative products; you will have lost confidence in the brand".

Mr Law repeated that evidence in his examination in chief (3.33), and I accept it as correct.

[117] The defenders' Quality Manager, Mr James Couper, continued in post until the Carrongrove Mill closed in November 2005 and thereafter was employed by the pursuers on a short-term basis to assist with handling customer claims arising from paper manufactured by the defenders. He noted a change in the defenders' approach to complaints handling in early 2006 (statement, paragraph 52). At the end of February or beginning of March, however, he was asked not to visit Carrongrove further (paragraph 53). This caused considerable difficulties in relation to complaints handling and the payment of rebates to customers. Mr John Dougan, the pursuers' Technical Services Manager, whose position in the company broadly corresponded to that of Mr Couper, stated that at this time the pursuers did not know what complaints were coming into the defenders, or who had done anything about them, or indeed what had been done. He described this as "very very frustrating" (18 November, 11.21). At this point a lot of complaints came in very quickly, and the defenders' attitude changed. Telephone calls came in from customers who wanted to know what was going on. By January or February 2006 the defenders gave very little or no approval in relation to any complaints. The defenders' management were simply sitting on them, and not providing any feedback. In some cases they were contacting customers themselves to negotiate. Some customers were shocked at how they were treated. Mr Dougan had seen letters in which the defenders more or less suggested that the customers were dishonest.

[118] Mr Dougan was subsequently taken through a number of documents relating inter alia to credit note authorizations resulting from defective product (18 November, 11.28 onwards; written statement at pages 16-123 and relative productions). I do not think that it is necessary to review this evidence in detail; it was quite clear that lack of co-operation from the defenders caused him great difficulty in processing claims made by customers. He stated in evidence (18 November, 2.18) that substantial delays had occurred, and the pursuers had had difficulties in discovering how Carrongrove was dealing with claims. The situation was very confusing. Credit notes had been issued, but that did not mean that customers received money. Eventually in March there was a court action. Furthermore, the majority of the claims were justified; this is set out in detail in his written statement. I found Mr Dougan to be a clear and straightforward witness, and accept his evidence on these matters.

Defenders' handling of customer claims prior to and during the early part of the Services Period

[119] By way of comparison with the foregoing conduct, it is significant that prior to and during the early part of the Services Period the defenders appeared to have investigated and paid claims promptly, in accordance with industry practice. That was dealt with by Mr Law (statement, paragraphs 5, 7, 29-39) and Mr Couper (statement, paragraphs 19-21 and 24). In addition, Mr Parr spoke to documents that the defenders had produced in relation to earlier claims (28 October, 11.46 onwards). In these documents the defenders had clearly regarded speed of response as important, and had been prepared to make conciliatory gestures in appropriate cases. Where, for example, they thought that it was not going to be possible to determine the cause of the problem a 50/50 compromise was offered (production S5068).

Effect of defenders' behaviour towards customers on Gemini brand and relations with Gemini customers
[120] The statements made by the defenders, and in particular by Mr Walker, to customers were extraordinary, and it would not be surprising if they had a serious impact on the Gemini brand and on customer relations. A considerable body of evidence supported that view.

[121] Mr Parr, commenting on Mr Walker's letter to Scientific Games International (production E1462), stated that threats could only damage goodwill and alienate customers from the Gemini brand. Mr Sinclair (30 October, 11.00) pointed out that complaints handling is vital and is part of maintenance of the brand. He could not understand how anyone in the paper and board industry would not appreciate its importance. Mr Sinclair was also asked to comment on a letter received by Mr Dougan from Scientific Games International (production E1635), in which they referred to the "unreasonable and confrontational approach adopted by Inveresk plc", and pointed out that in consequence they had been obliged to take legal advice. He was asked whether such an approach would have an impact on the brand value, customer relationship and goodwill, and he replied "absolutely. It would damage it severely" (30 October, 11.57). He added that he did not understand why the defenders were getting involved with Scientific Games International at this time, since the relationship was supposed to be the pursuers' responsibility. Finally, Mr Sinclair indicated, in relation to the letters written by the defenders to various Gemini customers, that their approach was liable to damage the customer relationship and the brand (30 October, 3.40 onwards).

[122] Two further witnesses from the pursuers gave evidence in this area. Mr Wallace (12 November, 2.50) stated that often it was not the supply of faulty paper that caused problems but how things were handled happened thereafter. If similar problems happen over and over again the result will be a loss of business, irrespective of the relationship between the parties. What the merchant will do if he has complaints on a particular brand for a particular customer might be to offer an alternative to solve the customer's problem. In this way the merchant helps to build his relationship with the customer but loses a sale for the mill. Merchants want sales, not complaints. Moreover, few merchants now have technical staff, with the result that complaints must be taken back to the mill for a response. Because merchants control a large part of the business, including the pursuers' brands and others, falling out with the merchant could affect brands other than the affected brand; the pursuers supply a range of brands.

[123] Mr Milne gave evidence (20 November, 12.45) that everyone in the market knew that New Gemini was the pursuers' product. Complaints were not been dealt with quickly or as they had been dealt with in the past. That would inevitably reflect badly on the pursuers' products. The merchant would be attempting to place responsibility for claims on the pursuers, to make sure that they were dealt with rapidly and correctly. At the same time the merchant would have printer customers who had the choice if they wished to go elsewhere, buying board from another merchant; alternatively they could buy board not manufactured by the pursuers. Consequently a speedy response to these issues was critical. The pursuers were experiencing repeat problems, and answers were not coming quickly. The result would reflect on the pursuers' brand as a whole.

[124] Evidence on these matters was also available from Gemini's customers. Mr Tschoner (3 November, 10.38 onwards) indicated that customers are concerned as to the way in which quality complaints are dealt with, and that this is important for both the customer and the merchant. If the brand begins to suffer from increased quality problems that affects the ability to supply the brand to customers. He was asked whether, if salesmen are aware that the brand is experiencing quality problems, that has an effect on their ability and willingness to sell it to customers. He replied that the problem is that, if a customer is affected by lower quality, he loses confidence. At that point Mr Tschoner's own sales team would no longer push for the sale of this specific product. He was then asked whether, if a customer lost, faith in a brand such as Gemini in 2005, there were other brands that they could have used to supply their requirements. Mr Tschoner replied that he could not use anything that came from his own company. Customers would possibly have been able to turn to one of his competitors. He did not have a replacement product. Thus they were liable to move business from him as a merchant. If the customer lost faith he would change the brand and the merchant.

[125] Mr Tschoner gave further evidence that, if a person to whom a complaint was made refused to deal with it within a reasonable time, that would affect the relationship of the merchant and his customer. This point was "very strong", and could even lead to the loss of the customer (3 November, 10.54). In the period after November 2005, the defenders' behaviour in relation to complaints changed; there were more and more delays. He did not remember exactly when this started, but as the number of complaints increased he noticed that dealing with them took longer. In relation to the effect on Gemini customers, Mr Tschoner's clients and MAP were angry, and it was difficult to promote the Gemini brand any further (3 November, 11.31). Mr Tschoner was then asked about the payment of consequential loss suffered by customers, in addition to their board costs, and he stated that in the paper industry it is absolutely normal that besides board costs, consequential loss will be discussed and paid. He was asked what would happen to his customers if he refused consequential loss, and he replied that they would no longer buy from him. This was said in a very definite manner, and I have no doubt that it is correct. Mr Tschoner was also concerned at the time taken to settle complaints (written statement, paragraphs 12 onwards). A complaint involving a customer, Grasl, had taken seven months to be settled by the defenders. He described this delay as "absolutely unacceptable", in very definite terms. Normally he would expect a complaint to be decided within four to six weeks; that is the industry norm. No customer will wait seven months for compensation, and the result is that the merchant has to step in and pay the customer and then try to seek reimbursement with the producer. He added in oral evidence (3 November, 11.50) that if payment is not made promptly he would expect the customer to get angry.

[126] Mr Hasecker, whose company, Papier Union, purchased what was in fact the defenders' Gemini board but sold it under the merchant's own label name Duocard, stated (4 November, 10.17 onwards) that his department would not usually be involved with complaints but became involved because of a large number at this time. In particular, a large number of unhandled complaints had remained open, and he had to solve them. He stated that, while complaints inevitably occur, they must be dealt with in as short a time as possible; 14 days was acceptable for a first reaction, and four weeks to close the complaint. Mr Hasecker stated that the first customer is the merchant's sales team: they must believe in the product. If they do not they will not push it. Mr Hasecker was asked what made the sales team more reluctant to push the product, and he replied that two issues were relevant: first, where they did not trust the product but believed it would end in a complaint from the customer; and secondly, where there was a feeling that quality was is at a disadvantage compared with other products. Papier Union had never had a problem on this scale apart from sales by the defenders. Finally, Mr Adrian Rigg, the head of procurement at BemroseBooth, gave evidence (4 November, 2.00) that Gemini could not be regarded as a trusted product in view of the events surrounding the ending of production at Carrongrove.

[127] On the basis of the foregoing evidence, I am of opinion that the behaviour of the defenders towards customers during and immediately after the Services Period was likely to damage the Gemini brand.

Conclusion regarding breaches of contract

[128] In the light of the evidence summarized above, I have no hesitation in concluding that the defenders were in breach of the contract with the pursuers, both in relation to the quality of the product manufactured during the Services Period and in relation to the treatment of Gemini customers who complained about defective board. In my opinion those breaches of contract were very serious. This is not a case where the level of defects was only slightly higher than normal; it is one where the level of defective production increased by more than three and a half times; the statistical evidence is set out at paragraphs [74]-[78] above. The very poor treatment of Gemini customers who complained was also very striking; in this connection, the defenders' letters of 23 February 2006 are particularly bad examples, but the bad treatment was much wider than that. Indeed, I thought it clear on the evidence that, once the scale of defective production became apparent in January 2006, the defenders' senior management, in particular Mr Walker and Mr Thomson, took a deliberate policy decision to reject customer complaints whenever possible, for the simple reason that by this stage they thought that the defenders' financial interest was merely to minimize the amount of their exposure to customers; they paid no attention whatsoever to the need to protect the brand and trademarks that they had sold to the pursuers. That was in my opinion a serious breach of contract.

Causation of loss

[129] The next issue is whether the foregoing breaches of contract cause loss to the pursuers and, if so, the amount of that loss. The evidence on this matter was contained largely in the evidence of the two experts, Dr Maciej Firla-Cuchra, of Oxera Consulting Ltd, and Mr Alan Overd, of CRA International. Nevertheless, for obvious reasons the expert evidence was dependent on certain parts of the factual evidence, including figures relating to the parties' trading performance, other financial information relating to the parties and statistical evidence relating to the paper and board industry, the latter being derived from the principal European industry body, CEPI. Evidence was also available about the complaints made by customers for both parties. All of that evidence was spoken to by the witnesses in fact, most notably Mr Gary Wallace, the pursuers' Finance Director at the time of the acquisition and now their Commercial Director, and also Mr Chris Parr; both of those witnesses were Chartered Accountants. So far as that factual evidence is concerned, I accept the financial and economic information given by those witnesses in their evidence, and I consider that it forms a proper basis for the expert evidence. I should add that the documentary evidence was very voluminous.

[130] It is also important, in considering whether loss was caused, to consider the nature of the assets acquired by the pursuers from the defenders. What the pursuers acquired was a brand, Gemini, and a list of customers who were in the habit of purchasing Gemini board. There was substantial evidence that brands are important in the paper industry. Thus Mr Sinclair stated (29 October, 2.42) that a brand of paper involves not just production; also inherent in the brand are customer support and service to the customer. Mr Milne (20 November, 12.40) stated that designers will tend to think of a brand, such as Trucard or Gemini. They will tell the printer to use that brand. If the brand is not known, the chances of getting business are reduced. Thus brand awareness exists at three levels: that of the designer, that of the printer and that of the merchant. Mr Tschoner (3 November, 10.35) was asked whether the name of the brand was important to the merchant selling to customers, and he replied that it was very important. He stated that in the market for graphic paper clients identify with the brand. They expect high standards from a brand, and it is important that the brand should meet such standards on price, service and availability. Mr Hasecker (4 November, 10.16) thought that brand name was important to the customer relationship, although he thought it was perhaps equally important with the product. In my view it is clear that the brand was important, especially in view of the structure of the market, with paper merchants, printers and designers all involved. It follows that damage to the reputation of a brand is an important issue.

Specific points covered in factual evidence

(i) Fall in Gemini orders

[131] A considerable amount of factual evidence was available to establish a fall in orders for Gemini during or shortly after the Services Period. I should note here that a number of customers did not wish to become involved in the dispute and to provide evidence (Mr Sinclair's statement, paragraphs 424-430). Nevertheless, I think that the evidence that was available clearly established a fall in orders. Mr Parr (written statement, paragraph 82; evidence on 27 October, 3.25) stated that he was very concerned that Gemini volumes were not converting to the pursuers at the anticipated levels. By January 2006 the pursuers' annualized run rate was approximately 20% below the level on which their investment had been calculated. Subsequently (28 October, 10.20) he gave evidence that sales to Schneidersoehne in the 12 months after the end of the Services Period had shown a fall of 19%. Sales to Papier Union had fallen by 35% during the same period (28 October, 10.56). Mr Parr also stated (28 October, 12.32) that he could see damaged goodwill in reduced volumes with key customers. It had been difficult to restore customer volumes, and Papier Union and Schneidersoehne had been well behind anticipated volumes. I noted that he appeared to be careful in this part of his evidence. Mr Sinclair (30 October, 3.10) stated that after their major complaint Dinkhauser had reduced purchases by 150 tonnes per annum. He further gave evidence (5 November, 3.18) that in the year following the Services Period the pursuers failed to reach the tonnage that they wanted. They believed that there was a reasonable expectation that they would reach sales of 23,500 tonnes on Gemini, but they failed to do so.

[132] Mr Wallace gave evidence (12 November, 3.15 onwards) that the ultimate customer, the user, was more interested in the brand than the manufacturer. If merchants perceive a brand as persistently unreliable or defective, they change the brand. Mr Wallace went on to give an example in the present case, that of Tipografic. That company had had problems with Gemini and became very unhappy with the product. Consequently they went to another manufacturer, Iggesund. They took business of 600 tonnes per annum with them. One of the pursuers' sales managers had worked with McNaughton, Tipografic's parent company, to get back this business, but Tipografic point-blank refused to take Gemini. They did, however, take Trucard on trial. They were happy with that, and now take 3-400 tonnes per annum of Trucard. The balance is obtained from Iggesund. Mr Wallace continued by stating that he had been aware from February 2006 that Gemini sales were not transferring to the pursuers at the rate expected. When asked the reason, he replied that he thought the cause was the fact that claims had gone through the roof. The drop in sales started from the end of December 2005 and continued through the first six months of 2006. The main thing that happened at this time was the major increase in complaints. He agreed that sales are never static, but referred to the graph produced by Dr Cuchra (discussed below) which showed that sales just dropped. During the first six months of 2006 the SBS market was growing; the index produced by CEPI for SBS sales grew by 3% in Western Europe during this period. Earlier in his evidence (12 November, 2.42), Mr Wallace stated that during the 29 months to June 2005 Schneidersoehne had received an average of £8,000 per month for complaints. During the five months of the Services Period the average was £25,000 per month. For Papier Union, the averages received for complaints per month ranged from £1,500 in the first five months of 2005 to £4,000 in 2004. In the five months of the Services Period they received on average £26,000 per month. Sales to Schneidersoehne went down by 33%, and sales to Papier Union by 20%. CEPI statistics showed that the German market had grown by 7 1/4% during the first six months of 2006. Finally, Mr Wallace stated (30 November, 2.39) that sales to Schneidersoehne had dropped by 32% in the six months from January to June 2006. He believed that Schneidersoehne had switched some sales in that period to another supplier, MeadWestVaco, as a result of the complaints that they had experienced on Gemini. They would have done so because they would wish as a merchant to maintain sales. They would have MeadWestVaco paper in stock, and when they had complaints about Gemini and had difficulty in resolving those, Schneidersoehne's own sales staff would have offered customers an alternative product to ensure that they as a merchant retained their business. If that had not happened, Mr Wallace believed that sales to Schneidersoehne would not have dropped by 32%. I found Mr Wallace's explanation of the attitude of merchants' sales staff to be entirely convincing; it is obvious that salesmen will not want to push a product that they think is likely to lead to a high incidence of complaints.

[133] Mr Tschoner (5 November, 11.33) gave evidence that, following the problems with Gemini during the Services Period, clients became angry and it was difficult to promote the Gemini brand any further. He worked with IT Papier, subsequently Antalis Austria, the leading Austrian paper merchant, and his views reflect the fact that a high incidence of customer complaints is likely to have an impact at the merchant level. Mr Tschoner further stated that Dinkhauser had stopped purchasing Gemini following their major complaint (witness statement, paragraph 36). In relation to the Dinkhauser complaint, he stated that it would take a long time to reposition Gemini in a good way in the market, at least six to eight months (5 November, 2.05). Finally, Mr Tschoner stated (witness statement, paragraphs 42-43) that a fall in business could not be prevented because as a result of the uncertainty about the quality of Gemini and the development of future possible complaints other suppliers were chosen; he continued:

"For me quality is all important and it is crucial that this is maintained. In my experience an increase in quality complaints, even when they are perfectly addressed and resolved, leads to a trading loss, because the printer with the background of this experience chooses another product in future. I know that Dinkhauser did not order Gemini for a time and I am convinced that this happened with other printers in this case, even though it is not possible for me to specify the amount lost".

Mr Hasecker, representing, Papier Union, stated (written statement, paragraph 18) that an increase in the volume of complaints will mean lost orders even where every care is taken to work fast to resolve the issue.

"Printers often place subsequent orders after complaints with one of our competitors. This will certainly have happened in this case, although I cannot say precisely which orders we have lost".

This point was repeated in his evidence (5 November, 10.47). He further gave evidence (statement, paragraph 29) that Papier Union had concluded that they had no option but to quarantine some of the stock produced at Carrongrove. There had been too many complaints to go on selling the stock held in store to customers. He stated that Papier Union risked undermining their name as a merchant and the Duocard label if they continued to sell sub-quality products. In evidence (5 November, 10.48) he stated that they had to stop sales of Duocard because the extent of complaints was so high. Mr Rigg, who represented BemroseBooth, gave evidence (5 November, 12.43, under reference to paragraph 19 of his statement) that if there is an opportunity to reassess materials on quality and price his company, BemroseBooth, do so. In this case they felt that their loyalty to the Gemini brand was not being reciprocated, and it made sense to look elsewhere for supplies.

(ii) Nature of the loss claimed
[134] In the pleadings (article 7 of condescendence) the losses claimed by the pursuers are described as a significant loss of sales and a consequent loss of profit on those sales, and causing important customers to cease doing business with the pursuers and other customers to reduce their level of orders or not transfer their business to the pursuers. The defenders submitted that Dr Cuchra's analysis was not a valuation of damage to the brand but rather an attempt to identify the tonnage of sales lost as a result of the defenders' conduct. In his evidence (4 May, 12.04) Dr Cuchra, after discussing the nature of the brand, stated that intangible assets are dependent on perception of customers and in the market; thus they can be damaged very easily. These are typically accounted for by looking at cash flows. This is because an intangible asset such as a brand has value through being converted into additional sales and hence cash. He was asked about this matter in cross-examination (6 May, 12.03), and stated that the value of a brand is based on cash flows over the life of the asset, appropriately discounted. If an existing business acquires additional assets, the value of these is the projection of cash flow over the life of the assets. That evidence was not directly challenged, and in my view it is clearly correct. On this matter, Dr Cuchra's evidence accords with the approach taken by the pursuers to the price to be paid for the Gemini brand and associated intangible rights; their calculation of an appropriate price was based on a payback period of four years. That is obviously a calculation of supposed value based on cash flows over a definite period.

[135] Moreover, Dr Cuchra explained the basis on which he proceeded clearly in the introduction to his first report (paragraph 1.18). This is as follows:

"Tullis purchased the ownership of the Gemini brand and information on Inveresk's customers. In economic terms, Tullis purchased the brand and customer relations, which represent valuable intangible assets. The value of those assets depends on the company's ability to realize additional cash flows from the assets since acquisition by means of increasing revenue. This revenue, and hence the value of those assets, can be impaired by poor customer service as well as other actions".

Thus Dr Cuchra based the valuation of the brand and the estimate of damage to the value of the brand on the degree to which revenue was generated or, correspondingly, the degree to which the generation of revenue was impaired. That seems to me to be an intelligible position, and I observe that it is one that was not seriously challenged in cross-examination.

[136] In their submissions the defenders suggested that the foregoing method of calculating the value of a brand was not appropriate. If, for example, a company with a well-known brand suffers losses for a time, the value of the brand is not reduced correspondingly. I do not think that that is a relevant comparison. It assumes that the valuation is based on net profits, but in fact Dr Cuchra's evidence was quite clearly that the valuation is based on cash flows. In a case where a company with a well-known brand suffered losses, the valuation of the brand would depend not on the current profitability of its trade but on the revenue that the brand is likely to generate over an appropriate payback period in the future.

[137] The defenders also submitted that the pursuers had ignored the case that they pled and instead treated the loss spoken to by Dr Cuchra as being damage to goodwill. That, it was said, involved changing the nature of their case. I do not think that that is so. The loss that is pled could perhaps have been better expressed, but the fundamental point is a loss of sales. It is the loss of sales that produces a reduction in cash flow, since that is the only return that the pursuers obtained from the brand, and it is that reduction in cash flow that gives rise to the pursuers' loss. The reduction in cash flow represents a diminution in the value of the brand because the latter is calculated by reference to those cash flows.

(iii) Pursuers' expectations at time of transaction

[138] In addition to the factual evidence relating to losses sustained by the pursuers, it is useful to consider the pursuers' assessment and expectations at the time when they entered into the transaction for the sale of the Gemini brand. This was spoken to by Mr Wallace, in particular, and also by Mr Parr and Mr Sinclair. Mr Wallace was responsible for assessing the financial benefits of acquiring the Gemini brand (written statement, paragraphs 5-26). One important point (made at paragraph 26) was that this was an acquisition where the benefits had to be earned in the first few years; a payback period of three to five years (ultimately four years) was assumed. I accept that evidence. A brand is an intangible asset, and it is obvious that the risk of damage to such an asset increases with time. Consequently a fairly short return period is to be expected.

[139] Mr Sinclair explained the benefits of the acquisition of the Gemini brand at some length in his written evidence (paragraphs 46-69); his analysis of the likely benefits is set out in an assessment of the marketing aspects of the acquisition found at production B419-423, commented on at length in his evidence (29 October, 3.28). In summary, Gemini was seen as a strong brand in need of focus and investment. Gemini and Trucard were broadly comparable and were seen by most printers as interchangeable alternatives. A detailed analysis of various national markets was provided.

[140] Mr Wallace expanded at some length on Mr Sinclair's assessment (12 November, 11.51 onwards). The pursuers' mill had a capacity of 75,000 tonnes. Based on the year from April 2004, the pursuers were running at an annualized rate of 63,500 tonnes; consequently they had the capacity to make another 11,500 tonnes without incurring further expenditure other than providing raw materials, power and distribution costs. This resulted from the five shift pattern used at the pursuers' mill, described below at paragraph [266]. The pursuers had assumed that they would retain 23,500 tonnes per annum of Gemini business out of the 38,000 tonnes per annum sold by the defenders. That amounted to 61.8% of the defenders' sales. This would be achieved by giving up markets such as North America, where sales were less profitable than in Europe (12 November, 12.32).

[141] Mr Parr and Mr Wallace were also asked to give general evidence regarding the scale of the pursuers' business operations and their relationship to the damages claimed. Mr Parr gave evidence (28 October, 12.53) that one purpose of the acquisition was to deal with the pursuers' unutilized board capacity at Markinch. In fact they failed to make use of the whole of their unused capacity. In 2006 the pursuers had 7,500 tonnes of unutilized capacity there, in 2007 7,000 tonnes, and in 2008 4,500 tonnes. Those figures were not challenged. Mr Wallace was asked (17 November, 11.18) to comment on the general proposition underlying Mr Cuchra's second report that the pursuers had suffered damage in the order of £4.8 million, and in particular whether it could be said that that was not representative of the pursuers' losses. Mr Wallace replied that, if the pursuers had filled the available capacity, they would have covered that sum over a period of three years. He was asked what percentage of annual sales over a period of three years the sum sued for represented. He replied that coated sales were now running at about 70,000 tonnes per annum Dr Cuchra had estimated a total loss between 8,000 and 12,500 tonnes over three years; that represented approximately 4,000 tonnes per annum. As a fraction of 70,000 tonnes, that represented approximately 6%. On the basis of this evidence, I am of opinion that it cannot be said that Dr Cuchra's estimates of loss are in any way disproportionate to the scale of business involved.

[142] The pursuers' expectations obviously cannot be in any way conclusive; they indicate what the pursuers hoped that the outcome of the transaction would be. Nevertheless, the evidence referred to above was backed up by detailed assessments and calculations carried out at the time of the acquisition. On the basis of these, I consider that the pursuers' forecasts were arrived at responsibly and with due regard to the factual position, so far as known to the pursuers at that time. The pursuers' expectations are also important in establishing that spare capacity existed; without that the business that, according to Dr Cuchra, the pursuers lost could not be accommodated by them. I am satisfied, however, that the spare capacity existed.

.

(iv) Linkages within paper industry

[143] Another area relevant to proof of loss and the amount of any loss was the existence of linkages within the paper industry. This is important because Dr Cuchra relied heavily on such linkages in adopting a general portfolio approach on a Europe-wide basis, whereas Mr Overd preferred an analysis based on individual customers and disaggregated country by country. In my opinion the factual evidence clearly established that substantial linkages exist. At a European level, I formed a clear view that the market is truly international, and that disaggregation country by country is not appropriate. While total sales in different countries can vary, sales of board by mills are at an international level. Apart from the pursuers and the defenders, who were the only producers of SBS board in the United Kingdom, the main producers were in Sweden and Finland, and to some extent North American producers entered the European market. It is therefore obvious that any mill is likely to sell its product in most Western European countries, and that in fact was true of both the pursuers and the defenders. I also formed the view that substantial linkages exist between individual firms, especially at the merchant level, where groups such as Papyrus and MAP (now Antalis) operated and continue to operate in a number of different European countries. These firms regularly shift stock from one country to another. In addition, these firms are, for obvious reasons, in contact with one another, and if, for example, one Papyrus firm has a bad experience with a supplier it is likely that other Papyrus companies will be informed. The trend in recent years has been very much towards integration within the industry and the creation of a number of very large merchant groups operating at a European level. Such groups are on occasion owned by paper mills; an example of that is Papyrus, who are owned by a paper manufacturer, Stora Enso. Schneidersoehne, as narrated above, were taken over by Stora Enso shortly before the parties agreed to transfer the Gemini brand. Yet another example of a merchant group closely connected with a paper manufacturer is Antalis, which is owned by a company called Sequana Capital; Sequana Capital also own Arjo Wiggins, a manufacturer of fine papers with mills in continental Europe and the United Kingdom (Mr Wallace, 30 November, 12.40)

[144] Mr Sinclair, as the pursuers' export sales and marketing director, was in a good position to know about the structure of the paper and board market. He covered the paper and board market in his written statement (paragraphs 19-36). He pointed out that the paper and board industry is international, and that increasingly merchants and printers are joined together to form much larger, essentially international, businesses. He further pointed out that merchants increasingly share logistics operations, with the result that sales by a manufacturer to one country may well be resold by the merchant in another. In evidence, Mr Sinclair referred (30 October, 11.28) to one of the leading international groups, MAP, which in 2005 and 2006 had subsidiaries in a number of countries: McNaughton and Premier Paper in the United Kingdom, ModoVanGelder and Grafisch Papier in the Netherlands, MAP Belux in Belgium, IT Papier in Austria and Modo Paper in Spain. He was then asked whether, if there were an altercation with one, that would be known to the others. Mr Sinclair replied "all too quickly, and also by senior management". That is what has happened in the present case, as what had happened in Austria became known to others in the group. (This was a reference to the problems with Dinkhauser, an important customer of IT Papier). Later in his evidence of (30 October, 2.47) he was referred to an e-mail that he had sent to Roland MacLeod of the defenders on 5 January 2006 (production D976), in which he mentioned that IT Papier were urgently chasing on behalf of Dinkhauser a definitive answer from the defenders on the outstanding complaint and claim. In the e-mail he stated:

"IT are pointing out again how significant this customer is for them and the MAP Group as well as for the New Gemini project at Tullis Russell".

In evidence he stated that Dinkhauser represented 500 out of every 1,000 tonnes of Gemini sold to IT Papier. Consequently the problem related not just to Austria but to the MAP group as a whole, which was the biggest stockist of Gemini in Europe, and of the pursuers' own Trucard brand.

[145] Mr Tschoner, whose company, IT Papier, became part of the MAP group, explained the operations of that group (3 November, 10.55). He stated that if the MAP company in Austria suffered serious problems owing to poor quality or service, the procurement department would be obliged to report to the company headquarters. The headquarters would then start to communicate with the manufacturer in the event of serious problems. If the problem affected more than one country, it would be discussed at meetings at group level. A different aspect of the wide geographical distribution of the product was illustrated by Mr Tschoner's evidence regarding the Dinkhauser complaint (3 November, 12.18; written statement, paragraphs 13 onwards). Dinkhauser had used the board to produce brochures containing samples for a firm manufacturing flooring material who sold their products in several European countries; consequently the defective brochures (13,000 in total) ended up in a number of different countries. Mr Slootweg, who was commercial manager for ModoVanGelder, a Dutch paper merchant forming part of the MAP group, referred in his witness statement (paragraph 3) to the very close relationship that ModoVanGelder had with other companies within the MAP group. These included working together as a team for purchasing, marketing and logistics. In evidence (3 November, 4.36) he was asked whether, if there were a problem with the supplier, it was likely that the other group companies would know. He replied that they certainly would. The group companies report to one another on a monthly basis, and in any event speak to one another informally about such matters. Consequently, if there were a problem with the product, it would be made known to all parts of the group. Mr Swain, who worked as technical manager for one of the companies in the McNaughton group of paper merchants, dealt with the 16 customer complaints experienced by McNaughton as a result of production during the Services Period (witness statement, paragraphs 6 onwards). He was asked whether, if there were an issue regarding board supplied to one of the companies in the McNaughton group, that would be made known to other companies in the group. Mr Swain replied that that can happen; printers will often tell other printers, and the sales representatives will find out.

[146] Mr Wallace gave certain general evidence about linkages within the paper industry in Europe. He stated (12 November, 2.57) that within the European market it was not possible to compartmentalize problems. Large merchants had operations across Europe. This was true, for example, of Antalis, Paperlinx and Inapa, all of which operated in various countries. The operations in different countries were all linked. The companies within a group will become aware of what is going on. Credit insurance, for example, would be discussed with merchants at both the group level and the level of individual companies. If an individual company limit is exceeded as a result of an order, it is shipped to another company within the group which is covered by credit insurance. Merchants were of great importance in the industry. Mr Wallace cited Carrongrove production during 2004. The defenders in that year had nine customers who took more than 1,000 tonnes. Of those customers, two were direct end-users and the other seven were merchants. The two end-users were numbers 3 and 7 out of a list of 9. Of total sales of Gemini in 2004, between 70 and 75% went to merchants. Later in his evidence Mr Wallace dealt with the manner in which information about products tends to be discussed within merchant groups. He was asked (13 November, 11.00) whether word-of-month reports occur in the industry. Mr Wallace replied in the affirmative. This occurred because 70 to 80% of business was with merchants, which have numerous branches throughout a country and in other countries. If they have problems on any product, word will get round all of their branches quite quickly. If an issue arises with one branch and it is treated badly, that can have a knock on effect with other branches. Nowadays the European paper market has come to be dominated by two main merchants, Paperlinx and Antalis (formerly MAP); those two groups accounted for between 50 and 55% of the pursuers' business. The only thing that was different in 2005 was that Antalis had taken over MAP. MAP had been number 3 in the world and Antalis number 2. Following the merger, Antalis was now number 1. At a later point (13 November, 12.50) Mr Wallace stated that merchant groups have realized that not every member of the group requires its own warehouse. Warehouses can be shared, as occurred with MAP Belux. Finally, Mr Wallace gave evidence (30 November, 12.40) that in relation to merchants owned by or associated with paper manufacturers (for example Papyrus, owned by Stora Enso, or Antalis, part of the same group as Arjo Wiggins), there is no guarantee that the manufacturer will force the merchant to sell the manufacturer's own product. In the case of Antalis and Arjo Wiggins, Arjo are capable of making the products sold by Antalis, but Antalis still sources competing products from other mills. Likewise, Papyrus continued to take product from the pursuers, even when they were taken over by Stora Enso in the early 2000s. Mr Wallace explained that if a merchant only took its parent company's product in one sector of the market, it would find that other manufacturers would be reluctant to supply their products in other sectors of the market where the parent company did not operate.

(v) Further evidence relevant to economic calculations

[147] A major point of difference between Dr Cuchra and Mr Overd related to the significance of acquisition effects, as against the harm done by the defenders' conduct; I discuss this point in detail in a passage that begins at paragraph [220] below. In summary, Mr Overd thought that a substantial part of the fall in sales could be explained as a natural consequence of the acquisition. Certain aspects of the factual evidence are relevant to this matter. These are discussed in part in paragraph [67] onwards above, but the following matters are also significant. First, evidence was available that, historically, the pursuers had managed to increase their sales and outperform the board market; this was spoken to by Mr Parr (29 October, 12.08). Mr Parr accepted that the paper market in general was going through a difficult period at the time of the acquisition. Nevertheless, I should add that the massive decline in sales that followed the Services Period goes well beyond anything that could be explained by market effects, and in any event Dr Cuchra's third method of calculating lost tonnage, an analysis of market shares, specifically compared sales of Gemini against the movement of the SBS market. I am accordingly of opinion that Dr Cuchra has adequately taken account of movements in the SBS market.

[148] A further area of evidence that is relevant to whether the drop in sales could be attributable to acquisition effects relates to the relatively small change in specification that occurred after the pursuers took over the manufacture of Gemini. Mr Milne, the pursuers' Coated Product Manager, gave evidence about the steps taken by the pursuers to bring to the attention of Gemini customers the impending change in the ownership of the brand (written statement, paragraphs 40 onwards). He stated (paragraph 49) that, as the pursuers had expected, customers' response to the change in specification was not significant. Trucard and Gemini could be used and were used by many customers interchangeably. This was evident in e-mail responses received from customers. Thus customers were already aware of the interchangeability of the two products (20 November, 12.19). Moreover (written statement, paragraph 61; 20 November, 12.20), when the closure of the Carrongrove Mill was announced large orders were placed to enable customers to carry themselves over the period when they decided who their new supplier of coated SBS board would be. That was something that tends to happen when there was a change of supplier. The defenders were unable to supply all of these orders and approached the pursuers to supply their own board. It was agreed that the pursuers would supply the and New Gemini product that they would be launching in November. This proved acceptable both to Carrongrove and to the customers, to some of whom significant quantities were supplied: UK Greetings took about 160 tonnes, Papier Union took more than 52 tonnes and Robert Horne took 100 tonnes.

[149] Mr Sinclair (5 November, 11.12) also referred to the defenders' asking the pursuers for assistance in fulfilling orders for Gemini or Duocard (the merchant's own label version) during the Services Period. No complaints had been received in relation to the specification of the product. Moreover, Carrongrove had been content that Gemini or Duocard orders were fulfilled in this way, even though it would have been apparent to, for example, Mr MacLeod that there were differences in the product. The manufacturing process is different (production Y6820) and consequently the product could not be identical. Mr Sinclair went on to give evidence (5 November, 3.32) that there had been no significant customer concern regarding the difference in specification. Part of the task of marketing was to explain the difference. Markets and customers tested New Gemini, and all the reports that were received were positive; customers said that the printability had improved over Old Gemini (written statement, paragraphs 77, 80). Indeed, at one time the defenders had marketed a Gemini board with gloss finish, which had been sourced from the pursuers. Mr Law (6 November, 2.51; written statement, paragraph 15) gave evidence that in most applications Gemini and Trucard were perceived as interchangeable. The difference was that Trucard was slightly glossier, but a layman would not know what that meant. As far as printers were concerned, the products were interchangeable to a degree. It is possible that it would be necessary to change their inks, but that is true of any change of product: the press is adjusted, a task which can be performed quickly. Provided that the marketing was carried out properly, he thought that there should be no problem with the move to the pursuers' product. The necessary presentation of the product could easily be achieved. It seemed to me that that evidence was significant. Mr Law was the defenders' sales and marketing manager at Carrongrove and was thus in an excellent position to assess the relationship of Gemini and Trucard. He clearly thought that the transfer of production from there to the pursuers' plant should not have caused any difficulties.

[150] Mr Parr (29 October, 11.25) was referred in cross-examination to a customer of IT Papier who was dissatisfied at the glossy appearance of New Gemini. This resulted in a loss of sales of about 7 tonnes per annum (production D1084A). He stated that the tonnage was relevant, because it was possible to lose small amounts like that. Nevertheless, he would have been told if major customers said that the gloss was unacceptable, but he was not. Mr Tschoner, the Sales Director of IT Papier, gave evidence about the steps taken by the pursuers to prepare them for the change of supplier (statement, paragraphs 4-6). He described the handover as "pretty smooth". Some of his colleagues had queries about the changes to the board, but they knew that the quality of production from the pursuers would be good. None of their own customers had raised any issue about the change of board, although one customer of a printer and said that he did not want the new product. That was the only case that he could remember (3 November, 11.10). Mr Tschoner went on to say that, if there is a change of product, it is necessary to increase marketing activities quite strongly. That had been done in this case. Mr Hasecker (4 November, 11.59) stated that Papier Union knew that the defenders had been looking for more gloss on their product, with the result that Papier Union were prepared for a higher level of gloss; they had told their sales force and carried out printing tests. Mr Rigg gave evidence (written statement, paragraphs 4-5) that BemroseBooth had been a long-term customer of both the defenders and the pursuers for Gemini and Trucard. He stated that they had always felt that Gemini from the defenders and Trucard were interchangeable as products for their phonecard production.

[151] The pursuers intended to sell the same board under both the Gemini and the Trucard labels. In practice, it is not uncommon in the industry for the same board to be sold under more than one name. Mr Sinclair gave evidence (29 October, 3.01) about merchant's own labels, which dominate the market at some levels. Trucard was not supplied for the purpose of merchant's own labels, but Old Gemini was so supplied. It was sold as Duocard in Germany, Solfana and Libra in Spain, and Duocoat in the United Kingdom. All of these were merchant's own label brands. Mr Wallace gave evidence (12 November, 3.03) that the pursuers' main interest in acquiring the Gemini brand was in sales to merchants. The brand name Gemini was strong with merchants. The pursuers had been trying to win business in the United Kingdom but could not because merchants wanted the brand name Gemini. If their customer wanted Gemini, that was a sale for the merchant. If the merchant took Trucard, there was a risk that their customer would look at other SBS brands, which might come from other merchants. Within the European market, the same product is frequently supplied under different brand names. Mr Wallace gave a number of examples of this. Mr Law (6 November, 2.38) gave evidence that most of the defenders' sales of Gemini had been to merchants, who stocked either the Gemini brand or a merchant's own label brand. The merchant's own label was Gemini with a different label; Duocard, sold by Papier Union, was an example of this.

[152] Against the foregoing background, I conclude that, first, the change in the specification of New Gemini was unlikely to have any significant impact on the sales of the product; and secondly, that the intention to sell the same board under both the Gemini and Trucard labels was unlikely to have any adverse effects.

(vi) Direct evidence of loss of customers

[153] Evidence was also available of loss of business because of the complaints arising out of Carrongrove production during the Services Period and the confrontational attitude taken by the defenders in dealing with those complaints. I have already considered the evidence of the representatives of Gemini customers, Messrs Tschoner, Slootweg, Hasecker, Rigg and Swain; they gave evidence of the way in which defective quality was likely to affect both merchants and customers. That evidence of itself makes it very likely in my opinion that Gemini sales were affected by the defenders' conduct.

[154] In addition, Mr Sinclair gave evidence of conversations that he had had with a number of Gemini customers (written statement, paragraphs 424-432; evidence on 5 November, 2.00, 2.48). The effect of that evidence was that merchants had lost specific customers or had had difficulty persuading their sales staff to push Gemini. Thus at Schneidersoehne, it had been difficult to convince sales staff that matters would change after the pursuers took over, and was ultimately easier to move to board supplied by Stora Enso. A representative of Moorman Karton stated that they had lost an important indent customer. Meulemans had lost Tesco as a customer because of problems with board supplied by the defenders during the Services Period. Union Papelera and their customers had considered that Gemini suffered a loss of reputation as a result of the complaints. Mr Sinclair stated that those individuals, and representatives of other customers, had been unwilling to take time off work to give evidence on the pursuers' behalf. Although this part of the evidence is hearsay, I accept it as establishing some instances where business was lost as a direct result of the supply of defective board. I found Mr Sinclair's account of his conversations to be both credible and reliable. Moreover, there is an inherent probability in what he said.

[155] On the basis of all the foregoing evidence, I conclude that sales of Gemini were seriously affected by the defenders' breaches of contract. The evidence of the witnesses was in addition strongly corroborated by the evidence of Dr Cuchra, discussed below, to the effect that the period immediately following the end of the Services Period was followed by a major drop in sales of Gemini by the pursuers.

(vii) Existence of loss: defenders' contentions

[156] The defenders presented a number of arguments to the effect that the pursuers had failed to establish any loss of business. First, they submitted that there was no evidence that important customers ceased doing business with the pursuers as a result of any action on the part of the defenders. Those customers were mainly merchants, and there was no evidence that any merchant had ceased to do business with the pursuers apart from Papyrus, which had ceased doing business for other reasons. Nor, it was said, had the pursuers identified any orders lost as a result of the defenders' acts with the exception of Dinkhauser. It was submitted that the Dinkhauser claim was without merit. In my opinion these arguments are not well founded. The critical point is that the ultimate users of Gemini are the merchants' customers, printers and end users. Orders from ultimate users drive the business. If they reduce purchases of a brand, that will reduce the mill's sales to the merchant, and it is not necessary that the merchant should cease to do business for a significant fall in sales to occur. Moreover, evidence was available of lost orders. Dinkhauser is one example; I do not agree, for reasons discussed elsewhere, that their claim was without merit. In addition, Mr Hasecker gave evidence (written statement, paragraph 18) that following complaints printers will place subsequent orders with competitors; he thought that this would certainly have happened in the present case, although he was unable to say precisely which orders had been lost. This statement was not challenged. Mr Slootweg gave evidence (written statement, paragraph 22) that the combination of complaints and rebate issues meant that the sales force of his company, ModoVanGelder, lost some of their desire to sell Gemini as they did not want any more trouble. This paragraph was the subject of cross-examination (3 November, 4.48); Mr Slootweg explained that the problem with the sales force was the atmosphere around the problems that had been encountered with the mill. Mr Tschoner gave evidence (written statement, paragraph 44) that the rise in complaints led to a fall in motivation in the sales team at IT Papier to sell the Gemini product. Internally he kept being asked what was happening with Gemini and what the problem was with the board. The sales team did not need that sort of trouble. There was no cross-examination on that evidence.

[157] It was also submitted for the defenders that none of the customers had been asked to consider to what extent the position in relation to lost orders attributable to defects differed from what would have occurred routinely. In my opinion there is no merit in this point. Customers routinely bought the Gemini brand, notwithstanding that a normal level of defects occurred. What occurred during the Services Period was a much higher incidence of defects, and it is that increase that is said by the pursuers to have brought about the fall in sales. Moreover, there was evidence from Mr MacLeod (6 November, 10.55) that the effective handling of complaints can be turned to a supplier's advantage. That of course did not happen in the present case. The defenders further submitted that there was no evidence that a particular customer of McNaughton, Tipografic, made any complaint in respect of board manufactured during the Services Period. There had, however, been evidence of a problem with board supplied prior to the Services Period. That is not factually correct; Mr Dougan in his written statement dealt with a number of such claims (12-020, 12-038, 12-094, 12-124, 12-302, 12-359, 12-363, 12-151 and 12-303). The defenders took a further point about a complaint made by another customer, Schut Hoes. Mr Sinclair in evidence had stated that a drop in their purchases in the first two quarters of 2006 was attributable to a large claim on board manufactured during the Services Period (11 November, 2.42). The defenders submitted that that claim was not made until the second half of 2006 (Mr Dougan's written statement, page 116). Mr Dougan stated that the complaint was raised on 4 July 2006, but he went on to say that a representative of the pursuers had visited the customer on 3 July to review the board in order to understand the complaint in more detail. Thus the complaint itself was made prior to July 2006.

[158] Finally, the defenders criticized the pursuers' calculations of expected sales. They pointed out that none of the pursuers' directors who were involved had experience in the acquisition of a brand from a rival. That is no doubt true; I suspect that experience of the acquisition of a brand on this scale is relatively rare. More importantly, however, the individuals in question clearly had great experience of the paper and board industry and the sale and marketing of paper and board. Consequently I think that their evidence about the acquisition is of considerable value, especially as it was clear that their preparations had been conducted with great care. The defenders then submitted that the assertion by the pursuers' witnesses that the targets set were reasonable must be rejected. As stated above, I consider that the pursuers' directors who considered the acquisition approached it in a realistic manner, and I am of opinion that the targets that they set were reasonable and obtainable.

Divergence in experts' views: basic approach

[159] Before I consider the expert evidence in detail, I should make certain observations about the general approaches followed by Dr Cuchra and Mr Overd. Dr Cuchra produced two reports in which he provided detailed calculations in order to demonstrate the loss suffered by the pursuers in consequence of the defenders' alleged breaches of contract. His first report was criticized in a number of respects in Mr Overd's first report. Dr Cuchra considered those criticisms and took them into account in preparing his second report, to the extent that he considered them valid. This may be taken to demonstrate flaws in his initial approach. Nevertheless, this is a difficult and complex area, and I do not think that it is surprising that Mr Overd was able to point out a number of errors; peer review, if it is properly done, is usually a very beneficial experience. The fact that Dr Cuchra took several of Mr Overd's criticisms into account tends, I think, to show an open mind. In giving evidence, too, he appeared to me to be undogmatic and fair-minded.

[160] It was clear that Dr Cuchra had taken into account extensive data for both sales and complaints derived from both parties, and information about the European board market derived from CEPI, the main trade body. He had also given consideration to the relevant literature, in particular in relation to acquisition effects, and had assessed the transaction in the light of that literature. In addition, he had information available from the pursuers as to the manner in which they intended to manage the acquisition of the Gemini brand. This was of some importance because the literature on mergers and acquisitions indicated that good management would make the likelihood of a successful outcome substantially greater. My impression was that in dealing with both the factual evidence made available to him and the relevant literature, Dr Cuchra took proper account of the information and applied it in a reasonable manner.

[161] Mr Overd did not provide a valuation of his own; instead he criticized the robustness of Dr Cuchra's reports. He was instructed to adopt such an approach (first report, paragraph 13). His basic position was that the quantification of damages in the present case was difficult, especially in disentangling the effects of the acquisition from the effects of the defenders' breaches of contract. His fundamental criticism of Dr Cuchra was that the latter's quantification of loss was not "robust" (second report, paragraph 6; repeated in evidence at several points). In addition, he made much of the position of Schneidersoehne; I deal with this matter below. Apart from these two matters, Mr Overd's criticisms were generally on points of detail. In addition, many of them related to Dr Cuchra's first report, which was later corrected.

[162] Overall, I formed the impression that Mr Overd's criticisms of Dr Cuchra represented a counsel of perfection. On various occasions he criticized Dr Cuchra's valuation on the ground that it was not certain or insufficiently exact. In court proceedings, however, evidence is rarely perfect. Witnesses are forced to do the best that they can with information that is incomplete or approximate. In the economic and financial field, almost any calculation is bound to have an element of uncertainty, frequently to a considerable degree. The fact that total precision cannot be achieved must simply be accepted; that is why in civil litigation the test of proof is on a balance of probabilities. In this case, my general opinion of Dr Cuchra's evidence is that he satisfied that test. No doubt some aspects of his evidence can be criticized; that was particularly true of his first report. Nevertheless, it seemed to me that his second report and his evidence in court were generally impressive. He had in my opinion used accepted and appropriate economic techniques, and had done so in a fair and reasonable manner. He used several different approaches in calculating the counterfactual, and these were averaged to provide a final result. Where assumptions had to be made, I thought that he did so on a conservative basis. Likewise, he was willing to accept that elements in his report required judgment. Where judgment had to be exercised, I am satisfied that he did so in a manner that was entirely reasonable and proper.

[163] It is also significant that the only factual evidence was presented by the pursuers. The defenders chose not to lead any factual evidence; nor did they provide their own valuation. The accounting and statistical information that was necessary for Dr Cuchra's report was provided by the pursuers; Mr Wallace was the employee who was primarily responsible for this task. Mr Wallace impressed me as a clear and careful witness, and I am satisfied that he collected the necessary information in an entirely proper and careful manner. The relevant evidence is referred to in Mr Wallace's written statement, in particular in the appendices. The information provided to Dr Cuchra about individual customers is set out in appendix 1 to his second report.

[164] I should observe that it appeared to me that the quality of the information provided to Dr Cuchra was noticeably better than that provided to Mr Overd; most of Mr Overd's information in fact seems to have originated with the pursuers. This is illustrated by the question of linkages. Dr Cuchra was aware of important linkages within the industry and took those into account in his reports Dr Overd, however, had not been aware of the fact that the pursuers had decided late in 2006 to transfer Schneidersoehne business to Papier Union (11 May, 2.32). Mr Overd accepted that on his bottom up approach he would address linkages, but that would require investigation. It was also clear that Mr Overd had not been fully aware of the steps taken by the pursuers to inform customers about New Gemini. Thus he admitted (11 May, 2.05) that he was not aware of trials carried out by Schneidersoehne on New Gemini, nor was he aware of details of the promotional steps carried out by the pursuers in Europe. He was also unaware that the pursuers had been asked by the defenders to manufacture Gemini during the Services Period. Yet a further example of his lack of information related to production within the United Kingdom; he was unaware that the pursuers and the defenders were the only two manufacturers of SBS board within the United Kingdom (11 May, 11.21).

[165] Mr Overd's basic criticism of Dr Cuchra was that his conclusions were not "robust". He was asked to explain this expression at the end of his examination in chief (11 May, 1.51). He stated that a conclusion can be described as robust if the underlying results are not sensitive to minor changes in the underlying parameters. For example, if a change in the composition of customers led to a reduction in statistical significance from 5/6 to 1/6, that would be a significant impact and an indication that the conclusion was not robust. If the results are not robust, Mr Overd stated that it indicates that the underlying model is not very good. He conceded, however, that there were degrees of robustness. In his first report Mr Overd considered the question of robustness in relation to a number of matters, which are discussed in the detailed review of the evidence set out below. In relation to these criticisms, I observe at this stage that if data inputs alter clearly the results must alter. Moreover, it seems to me that the adjustment that Mr Overd founded on most strongly was the exclusion of the defenders' largest customer, Schneidersoehne. For reasons set out below at paragraph [194] onwards, however, I consider that it was not appropriate to exclude Schneidersoehne, principally because the decline in sales that occurred there was in large part offset by an increase in sales to another customer, Papier Union; the pursuers made a deliberate decision to move the Gemini business to the latter company, partly because of a decline in sales to Schneidersoehne and partly because Schneidersoehne had been taken over by another board producer, Stora Enso. Mr Overd was cross-examined on this aspect of his evidence (11 May, 2.33). He stated that he had not seen the pursuers' communications with Schneidersoehne, nor was he aware of the exclusive agency relationship that they had entered into with Papier Union. He further accepted that it was appropriate to examine linkages within the industry; on his bottom up approach, he would have to do so. I thought that these concessions were of some significance. They must in my view cast some doubt on his reliance on the position of Schneidersoehne, in particular. If that aspect of his evidence is removed, what is left is relatively limited. I accept that there are some cases where altering underlying parameters appeared to affect the results obtained by Dr Cuchra to a significant degree. Nevertheless, I must look at matters generally, and it seems to me that the general import of Dr Cuchra's evidence is not seriously damaged. He was in my opinion correct on the treatment of Schneidersoehne and Papier Union, and I also thought his approach to a market share analysis was plainly correct. On other points of detail, for reasons set out below I thought that he was generally able to provide an answer to Mr Overd's criticisms. For that reason I decline to hold that his results must be rejected on the basis that they are not robust.

[166] Against the foregoing background, I now intend to set out Dr Cuchra's views on causation of loss. These are taken for the most part from his second report. In doing so I will deal with certain criticisms of Dr Cuchra's approach made in Mr Overd's first report and considered by Dr Cuchra in his second report.

Dr Cuchra's opinion on causation of loss
[167] Dr Cuchra's position is summarized at paragraph 1.17 of his second report. This is in the following terms:

"Tullis's position is that Inveresk's actions caused and/or significantly contributed to the decline in sales to the portfolio of acquired customers by damaging the acquired intangible assets. Based on the analysis of different potential factors that could have caused or contributed to the decline in sales, I conclude that Tullis's position is supported by the evidence that:

• Such a large and a rapid decline would be very unlikely to occur in the normal course of business in the absence of a major external event such as the wrongful act;
• the decline has occurred over the period of the Services Agreement and immediately thereafter and therefore coincides with the behaviour constituting the wrongful act;
• there has been a significant rise in the level and value of complaints over the same period of time, which indicates that it is likely that customer relations have [been] significantly affected by the wrongful act;
• the characteristics of the merger in this case and the fact that a proportion of the acquired business has not continued post-merger indicate that any potential impact of the merger itself (to the extent it was unrelated to the wrongful act) could not reasonably explain the observed drop in sales on the acquired portfolio; and that
• a combination of significant, idiosyncratic, customer-specific shocks or factors affecting the acquired portfolio beyond the normal course of business would not be expected to explain the decline in sales due to timing and the nature of such shocks ".

Dr Cuchra goes on (paragraphs 1.18 onwards) to state that customer relations are intangible assets, whose importance has been widely accepted in the literature. Brands are likewise intangible assets, which derive their value from characteristics such as uniqueness and broad appeal. Brand loyalty has been shown to have a positive impact on a firm's financial performance. Moreover, the association between quality in both product and service and customer relations has long been recognized. Academic literature was cited in support of these propositions, but I do not think that they were seriously challenged, and indeed they could be said to accord with common sense.

[168] In section 2 of his second report Dr Cuchra presents factual evidence to demonstrate why damage could be expected in this case. I found his reasoning on this matter especially powerful, and I will now proceed to summarize it. He focuses on the question (paragraph 2.2) whether it is reasonable to expect that the behaviour attributed to the defenders as the wrongful act caused and/or significantly contributed to a rapid and very significant decline in sales to the portfolio of customers acquired by the pursuers. In this context, Dr Cuchra considered comments in Mr Overd's report that the pursuers might have suffered no damage from any wrongful acts and that the decline in sales might be attributable to other factors.

[169] Between the second quarter of 2005 and first quarter of 2006, the combined sales of the parties to Gemini customers declined by 30% (figure 2.1). Dr Cuchra drew attention to the particularly striking nature of the full because of its size and because it occurred over a short period of time. Over several years prior to the acquisition, the sales to that portfolio of customers had been trending upwards and had in fact outperformed the market for SBS board. At the same time the quarter-on-quarter changes in sales to the Gemini portfolio had exhibited only limited variation upwards and downwards. There had been nothing like the drop in sales during this period. Two trends were apparent following the acquisition: the rapid decline in sales in late 2005 and early 2006 and a period of relatively stable sales following that initial decline, albeit at a lower level. The question accordingly arose (paragraph 2.13) whether the large initial decline in sales could occur through the coincidence of a series of one-sided large, idiosyncratic, customer-specific shocks or events, or might have been the result of various events taking place in the normal course of business. Dr Cuchra's opinion was that the evidence suggested that such a significant fall in sales over such a short period would not be expected in the normal course of business in the absence of a major event or events affecting sales. To confirm this view Dr Cuchra examined the performance of four randomly selected portfolios of the pursuers' customers between the first quarter of 2005 and the fourth quarter of 2008 and the evolution of sales to the acquired portfolio over the period, before the wrongful act, from the first quarter of 2003 to the second quarter of 2005. The performance of those portfolios suggested that the performance of the acquired portfolio in the three quarters after the wrongful act was abnormal: the change in sales in the acquired portfolio was a drop of 29.2% whereas the median change in sales in the same portfolio over any three consecutive quarters between the first quarter of 2003 and the second quarter of 2005 was only 3.9%. Based on these figures, the probability that the change in sales over the three quarters from the start of the Services Agreement would be less than 29.2% was 94%. The probability that such a change will occur in the normal course of business was accordingly very small. A similar conclusion was reached when the historical performance of the acquired portfolio was examined. Consequently, on the basis of available information about the past performance of the acquired and comparable portfolios, the evolution of tonnage to the acquired customers could not be explained by either the normal course of business or the historical performance of the acquired portfolio (paragraph 2.19).

[170] The next question considered by Dr Cuchra in his second report was whether the observed decline could in fact be reasonably linked to the defenders' behaviour (paragraph 2.20 onwards). His conclusion was that a causal relationship existed between the wrongful act and the decline in sales to the acquired portfolio. In economic terms, the pursuers acquired two assets from the defenders: the customer relations based on the defenders' order book and the Gemini brand. In view of the nature of the intangible assets and the nature of the industry, the value of the intangible assets could be easily impaired. In particular, the value of such assets depended on the quality of paper supplied, the quality of associated service and the pursuers' reputation. In turn, impairment of the value of the intangible assets would be expected to have significant ramifications for the pursuers' ability to realize sales from these assets. The importance of maintaining good customer relations has been widely accepted in the relevant economic literature. The economic literature suggested that a brand is an intangible asset, deriving its value from characteristics such as uniqueness and broad appeal, and that there was strong evidence that brand loyalty had a positive impact on a firm's financial performance. The literature likewise recognized an association between quality of both product and service and customer relations. Correspondingly, inferior quality of service or product can have a detrimental effect on sales, both because customers switch their orders and because of the impact on management time of dealing with complaints and trying to preserve reputation instead of acquiring new business or enhancing customer relations. The management and handling of complaints was identified in the literature as an important aspect of service quality. Finally, empirical research suggested that it might cost up to five times as much to obtain a new customer as to keep an existing one. Negative and detrimental consequences of the defenders' actions were likely to be particularly pronounced in this case because the paper industry was characterized by relatively homogeneous products with commodity-like characteristics. In that situation, service quality is particularly important for maintaining customer relations and preserving the value of the brand, since it is difficult to achieve differentiation through product specification.

[171] The pursuers had indicated a number of events to Dr Cuchra which in his opinion would be expected to affect the value of the acquired intangible assets (paragraphs 2.30 onwards). These comprised the supply of defective board and poor complaints handling, matters which are discussed at length in earlier part of this opinion. Dr Cuchra concluded that, based on the existing research on the economic relationships between such actions and the expected impact on the intangible assets acquired by the pursuers (customer relations and brand) and the evolution of sales and the relevant customers, it was reasonable to expect that the defenders' behaviour had led to a significant and prolonged decline in sales. This was supported by further evidence (discussed at paragraphs 2.40 onwards) which suggested that the number of complaints about paper manufactured by the defenders in the third and fourth quarters of 2005 was approximately 3 times higher than the average value over the period from the first quarter of 2003 to the second quarter of 2005, and that customers who experienced a higher number of complaints tended, on average, to reduce their tonnage by more than those who experienced the lower number of complaints.

[172] Dr Cuchra then went on (paragraphs 2.47 onwards) to consider a number of factors that Mr Overd had suggested could potentially contribute to or explain the observed decline in sales. The first of these was the evolution of demand from the portfolio of customers, together with market dynamics, which could have affected sales irrespective of the wrongful act. In order to test the relevance of this factor, Dr Cuchra examined information on the evolution of sales to a comparable group of customers (comparable customers of the pursuers) and the evolution of the relevant market benchmark) (sales of SBS board by European paper manufacturers in the eight markets under consideration, using information provided by the Confederation of European Paper Industries). This disclosed that the acquired portfolio had performed markedly worse than either of the competitors (comparable customers or market benchmark) (figure 2.4). The decline, I should observe, is very striking. Dr Cuchra concluded that this evidence suggested that another factor must be responsible for the decline in sales to the acquired customers. He nevertheless thought that, in constructing counterfactual scenarios to estimate the actual loss suffered by the pursuers, it was reasonable to take account of the two benchmarks used in this comparison, to allow for any impact that market trends might have had on sales.

[173] The second alternative explanation suggested by Mr Overd was that changes in the evolution of sales to a particular customer could be due to the occurrence of a large idiosyncratic shock specific to that customer. The possible existence of such events was considered in a subsequent part of Dr Cuchra's second opinion. Nevertheless, specific idiosyncratic shocks affecting a portfolio of customers of this size could reasonably be expected to cancel one another out; a set of random shocks would be expected to include both positive and negative shocks, and there was no a priori reason to expect more negative or more positive shocks in any particular period. The evidence in Dr Cuchra's opinion indicated that the volatility of sales observed for the portfolio of acquired customers prior to the wrongful act was lower than the volatility of randomly selected portfolios of the pursuers' customers (figure 2.5). That indicated a lower likelihood of significant change over any given period. This evidence accordingly suggested that it did not seem reasonable to expect that the observed reduction in tonnage in the portfolio after the wrongful act was caused by a simultaneous impact of a series of idiosyncratic shocks, unless it could be explained by factors or shocks specifically related to the acquisition. Such shocks were also more likely to be relevant to small rather than large portfolios of customers, since with a large portfolio the events are more likely to offset one another. The time profile of the reduction in sales after the wrongful act also suggested that a combination of idiosyncratic shocks was an unlikely explanation; if a series of random negative shocks were to explain such a large decline in sales, it would be reasonable to expect the decline to occur over a longer period, resulting in a more gradual decline. Moreover, after the initial significant decline, sales recovered in the latter half of 2007. For the same reasons as those applicable to the fall in sales, it was unlikely that coincidence of positive customer-specific shocks could explain the increase. The increase rather seemed to represent an improvement in sales as the effects of the wrongful act abated.

[174] The third alternative explanation suggested by Mr Overd was that the acquisition itself might have had a negative impact on sales. On this matter, Dr Cuchra's conclusion was that overall the effects of the acquisition were unlikely to be a major cause of the observed reduction in sales to the portfolio of acquired customers that Dr Cuchra had used to estimate the pursuers' loss. (This is discussed below; to allow for possible idiosyncratic shocks Dr Cuchra had reduced the acquired portfolio of 41 customers to alternative portfolios of 40, 30 and 22 customers; ultimately he preferred the portfolio of 30 customers as the best means of estimating the pursuers' loss). In this connection Dr Cuchra had considered a range of research on mergers, which had indicated, as might be expected, that mergers can result in increased or decreased sales. Three factors were identified as determining whether a merger was likely to be successful: success is likely if (i) the merged company retains the focus of the business; (ii) the acquirer has experience in the type of assets being acquired; and (iii) there has been early planning and quick integration. Dr Cuchra thought that those factors had been satisfied in the present case, especially the first two. I observe that it seems clear to me that the pursuers retained the focus of the Gemini business after the acquisition, and that they had experience in the type of assets that were being acquired. I was also impressed by the degree of planning spoken to by the pursuers' witnesses, in particular Mr Parr and Mr Sinclair. I accordingly conclude that Dr Cuchra was justified in thinking that this was a case where the factors pointing towards success were present. In the result, integration was obviously delayed by the need to handle customer complaints, but if these had not occurred to more than a normal extent I would have expected integration to be fairly rapid.

[175] Research had shown that mergers can result in an overall decline in the combined sales of two entities post-acquisition by approximately 5-12%. That could be regarded as a conservative benchmark. In the present case the pursuers had decided not to sell Gemini paper to markets in the United States, Canada, Russia and Israel, and these had represented approximately 10% of the defenders' sales. Thus the figures used in Dr Cuchra's analysis already allowed for a 10% decline in Gemini sales. I should add that Dr Cuchra admitted that he did not have great experience of assessing merger effects, and his evidence was criticized by the defenders on that account. It seems to me, however, that in presenting economic evidence there is a practical limit to the level of detailed expertise that can be expected from any one witness. No doubt in an ideal world one might have a team of experts each giving evidence on their own highly specialized area, but in practice that does not seem realistic, and it would in any event add substantially to the costs of litigation. In the present case Dr Cuchra plainly had ample experience in the field of calculations relating to intangible assets, including their valuation, and he had examined the important literature on merger and acquisition effects. In the circumstances I am not disposed to reject his evidence on acquisition effects because it did not fall within the main area of his practical expertise. Overall, it seems to me that he was quite justified in thinking that the acquisition of the Gemini brand had been properly planned by the pursuers; that the focus of the parties' existing Trucard and Gemini businesses was fully maintained following the acquisition; and that the pursuers' experience in the manufacture of board pointed to the successful integration and management of the Gemini brand. Indeed, on the second and third of these points, it seems to me that the parties' Trucard and Gemini businesses were remarkably similar, and that in these circumstances it would be expected that the acquisition would be successful.

[176] Dr Cuchra concluded this part of his report (paragraphs 2.81-2.86) by stating that the value of the intangible assets acquired by the pursuers could easily be impaired by quality and customer relations issues over a short period of time. It was reasonable to expect that such behaviour would have led to lower sales. The sudden and rapid decline in sales suggested that idiosyncratic, customer-specific factors or shocks were not the cause. Comparison with the performance of other portfolios and the overall market further supported that conclusion. In relation to acquisition or merger effects, the present acquisition had a number of the attributes that characterize successful mergers. Consequently it was reasonable to expect that a significant decline in sales was at least partly due to the wrongful act. I accept that conclusion, on the basis of the evidence discussed in Dr Cuchra's report.

Conclusion on causation

[177] In the foregoing circumstances, I conclude that the pursuers have established that the breaches of contract on the part of the defenders caused them to lose sales to a significant degree in the period immediately following the Services Period.

Quantification of loss: methodology

[178] I will now consider the approaches taken by the two experts to the quantification of any loss that might have occurred in consequence of the defenders' conduct. Perhaps the main point of disagreement related to the general approach to be adopted in calculating loss: whether to perform the calculation on the basis of a portfolio of customers, as Dr Cuchra did, or instead to consider individual customers and consider each case whether they can be shown to have taken Gemini business away from the pursuers in consequence of the defenders' behaviour. I will first consider Dr Cuchra's approach, and then the defenders' criticisms of that approach.

Dr Cuchra's report: methodology

[179] Dr Cuchra considered the quantification of the pursuers' loss in sections 3-6 of his second report. In section 3 he set out the conceptual approaches that he considered relevant to the estimation of damages in the present case. The basic methodology required a comparison of the actual profits under the "factual" scenario and the "counterfactual" profits that would have been expected in the absence of the wrongful act. That basic approach was accepted by Mr Overd. The counterfactual scenario accordingly represented the profit that would have been earned by the pursuers from the Gemini customers acquired from the defenders in the absence of any wrongful act. Such a profit should be calculated on the basis of counterfactual tonnage and margins. The lost tonnage was estimated using a "portfolio" methodology. This was an established methodology used to value intangible assets; it involves consideration of the net change in sales for the portfolio of customers against a reasonable estimate of the counterfactual, which is how such a portfolio would have evolved but for the wrongful act.

[180] Dr Cuchra considered that the portfolio methodology was the most appropriate for a number of reasons (paragraph 3.6 onwards). First, he stated that it is conceptually robust because it has the ability to capture commercial and economic linkages between different customers, including the implicit impact of brand and reputation. Actions that directly affect sales to one customer can cause a direct or indirect effect on sales to another customer. Secondly, the portfolio methodology is characterized by better statistical properties that any "bottom-up" estimates of damage for each customer. Dr Cuchra considered this to be an important conceptual advantage, which gave greater certainty in the estimation of the counterfactual scenario. In particular, the uncertainty around the counterfactual for a portfolio of customers is lower than the uncertainty around the estimates for individual customers. Idiosyncratic, company-specific factors that lead to uncertainty around counterfactual estimates for individual customers are diversified when customers are considered on a portfolio basis, so that such factors tend to offset one another. Thirdly, the portfolio method requires the estimation of one counterfactual scenario, which can be established with some certainty and cross-checked against a number of known and available benchmarks. Estimating separate counterfactuals for each customer is speculative unless a robust assessment of the likely evolution of demand for each individual customer can be performed. The ability to cross-check against appropriate benchmarks arises because idiosyncratic factors can be expected to offset each other at the portfolio level. Dr Cuchra accepted that it was possible that idiosyncratic factors did not offset each other for the whole portfolio of acquired customers. To control for this, a specific adjustment was required, which was discussed in section 4 of his report.

[181] The choice of portfolio was important, and was considered by Dr Cuchra at paragraphs 3.18 onwards. In principle, he was of opinion that the analysis should be performed against the whole portfolio of customers acquired by the pursuers, without exclusion. In the present case, that would mean that the lost tonnage would be estimated on the basis of the 40 largest customers acquired by the pursuers from the defenders. There are two main conceptual reasons for not excluding any customers. First, the broader the portfolio, the more likely it is that idiosyncratic customer-specific factors would offset each other at the portfolio level. Secondly, the choice of any customers to be excluded from the analysis might lead to biases in the estimates. Thus if customers affected by the wrongful act were excluded that would lead to an underestimate of the damage. At the same time, however, if idiosyncratic customer-specific factors are thought to have had a significant one-directional impact on sales, and if there is no evidence to suggest that their exclusion would result in a bias in the estimate of the damage, it is reasonable to exclude such customers. Overall, such exclusions are likely to lead to an underestimation of the damage, in that sales to excluded customers might in fact have been affected by the wrongful act. Nevertheless, such an exclusion would be expected to improve the accuracy of the overall estimate of damage.

[182] In the present case, sales to certain customers appeared to be affected by large idiosyncratic shocks. In order to ensure that the impact of such shocks does not bias the overall calculation, the analysis can be performed on a modified portfolio of customers, excluding certain customers. In this way the approach controls for the impact of large idiosyncratic shocks that might not be offset at portfolio level. There were also some customers to whom sales might have been affected by idiosyncratic customer-specific factors as well as by the wrongful act. Dr Cuchra retained such customers in his sample of affected customers. This he thought appropriate because it was reasonable to expect that at a portfolio level such idiosyncratic factors would offset each other, even if the presence of such factors added to the uncertainty of the overall estimates. Dr Cuchra and Mr Overd agreed that an adjustment for some idiosyncratic factors was required in the present case, but they disagreed on the appropriate scope of this adjustment. In particular, Mr Overd tended to the view that all customers affected by factors other than the wrongful act should be excluded. In Dr Cuchra's opinion such an approach to the exclusion of customers is not consistent with the portfolio methodology and was likely to bias the estimates.

[183] A further important element in Dr Cuchra's methodology was estimating the counterfactual scenario. A number of benchmarks were available for this task, including historical sales to the acquired portfolio of customers, the performance of the market for SBS paperboard, and the performance of a control group of comparable but unaffected customers. It is accepted economic practice to use more than one benchmark, in order to reflect more of the underlying data and to reduce the effect of biases in individual approaches. In his first report Dr Cuchra had used four approaches to estimating the counterfactual; these made use of historical sales, the performance of the market (in two approaches), and comparable customers. Mr Overd had suggested that just one method should be used to estimate the counterfactual, based on the evolution of the market, but Dr Cuchra did not favour such an approach because using market factors alone was unlikely to capture all of the relevant factors determining the evolution of counterfactual tonnage. In particular, he thought that the performance of an unaffected group of customers (the pursuers' own customers) was another important benchmark, since those customers were comparable to the defenders' Gemini customers that were not affected by any wrongful act.

[184] Mr Overd had suggested that the counterfactual tonnage and hence the damage should be estimated for each individual customer separately. Dr Cuchra commented on this at paragraphs 3.36 onwards. He stated that such a method might have an attraction in that it accounted for every aspect of sales to each individual customer, but he thought that the method had severe conceptual and methodological flaws. First, this method could not account for cross-customer effects in the portfolio. In a number of cases the evidence showed that sales to one customer were linked to sales to other customers. Thus the pursuers and Papier Union entered into discussions and ultimately reached a decision that the pursuers would stop supplying Gemini to Schneidersoehne from January 2007 and would supply Gemini to Papier Union instead. The pursuers would not have made that decision had the Schneidersoehne tonnage not already decreased significantly. Dr Cuchra described this factor as being at the heart of the valuation of intangible assets, where sales to individual customers are correlated. Consequently, if Mr Overd's methodology were adopted all such costs and customer effects would have to be separately identified and quantified, on a customer-by-customer bases. Dr Cuchra thought that this would fundamentally contradict economic theory and would be impossible to do robustly in practice. Secondly, from a practical point of view, Dr Cuchra was of opinion that the consideration of individual customers would not produce robust results. Under this methodology, the impact of the wrongful act would be to be distinguished from a range of idiosyncratic factors applicable to individual customers. Thirdly, such an approach was open to speculation about the exact behaviour and decision-making process of each individual customer. Even the customers themselves might not be able to identify what would happen in the counterfactual scenario. Without that knowledge, however, there was a danger that arbitrary assumptions would be made about customer behaviour.

[185] Dr Cuchra illustrated these points in an important passage in his evidence (4 May 2010, 2.58-3.26, under reference to illustrative drawings numbered 1 and 2). He pointed out that, in the case of each individual customer, actual sales would represent a combination of the effects of the damage and general market factors, which might offset each other or might alternatively operate in a cumulative fashion. Matters became more complex, however, when transfers of business from one customer to another are brought into the calculation. In such a case the transfer of business can hide the fact that the customer who provides the new business may itself have suffered significant damage as a result of the wrongful act. Thus (illustrative drawing 2) sales to customer A may appear to rise while sales to customer B may appear to fall sharply. This scenario can result, however, in a case where sales to both customers have been significantly damaged by the wrongful act, but to mitigate the effects the supplier has switched sales from customer B to customer A. If the customers are looked at individually, because sales to customer A have risen, it appears those sales have not been damaged by the wrongful act, but if a portfolio approach is used the linkage between the two customers is taken into account and the overall level of damage is brought out. Dr Cuchra stated that linkages of this sort are crucial. The example also illustrates the risks of taking individual customers out of the portfolio, as Mr Overd had favoured. In the example discussed, if either customer A or customer B were excluded from the portfolio, the results would be seriously distorted. In my opinion this part of Dr Cuchra's evidence was well argued, and I consider that it strongly favours his use of a portfolio analysis.

Dr Cuchra's report: identification of portfolio

[186] Dr Cuchra discussed the identification of the portfolio of affected customers in section 4 of his second report. This section was prepared following comments by Mr Overd on Dr Cuchra's first report, and took into consideration additional information provided by the pursuers following the preparation of the first report.

[187] The pursuers had acquired 40 customers from the defenders (table 4.1). (In fact 41 customers had been acquired, but one was excluded because it did not purchase a significant amount of SBS board). As explained above, Dr Cuchra considered that in principle the estimation of damage should be performed on the whole portfolio without exclusion. Mr Overd had suggested in his first report (paragraph 53) that customer "churn" can be observed for a variety of reasons: first, it may arise in the normal course of business, as a customer's demand rises and falls or customers switch between suppliers; secondly, the acquisition itself might cause customer churn because the new supplier is less competitive, or the customer may have a multi-sourcing policy, or the new supplier's portfolio may be different from that previously available; and thirdly, customers may have switched suppliers or reduced their purchase volumes as a result of the alleged wrongful conduct. Dr Cuchra pointed out that first and second of those factors can result in either an increase or decrease in tonnage. In addition, many of the factors mentioned by Mr Overd should normally be captured through the construction of the counterfactual and therefore do not require further adjustment. This applied to normal market shocks, in other words normal rises and falls in demand from customers. For example, a customer who in the normal course of business fluctuations experienced increased demand might switch the supply to meet that demand to another supplier. Making allowance for these adjustments on a customer-by-customer basis would be extremely difficult, and Dr Cuchra thought it unlikely that such adjustments could be made robustly, accurately and comprehensively. Moreover, extensive additional information was required about customers' decision-making processes and all relevant business considerations (paragraph 4.9).

[188] Dr Cuchra went on to state (paragraph 4.14) that the behaviour described in paragraph 53 of Mr Overd's first report could be expected to occur in the normal course of business. It would therefore be inappropriate to adjust for those factors twice: once in the construction of the counterfactual scenario and a second time by exclusion of some customers. It would also be inappropriate to adjust for such factors only when they result in a decline in sales. On a portfolio approach, however, such factors should be captured in the counterfactual. As an example, the fact that some customers might have been switching from SBS board to folding box board, as mentioned by Mr Overd in his report, would be an example of factors influencing the evolution of the market and would be captured in the counterfactual scenario based on market trends.

[189] Dr Cuchra discussed the criteria for exclusion of customers from the acquired portfolio at paragraphs 4.22 onwards of his second report. He accepted that it could be appropriate to exclude customers from the portfolio if it were clear that they were subject to significant idiosyncratic shocks or factors of an exceptional nature and where such a shock or factor affecting sales would not have been expected to occur in the normal course of business. Such shocks would have to be sufficiently large, in one direction, in order to affect significantly the evolution of sales in the overall portfolio. In addition, Dr Cuchra thought it important that any relevant idiosyncratic customer-specific shock can be reasonably assumed to explain most of the observed performance in sales if the relevant customer is to be excluded from a portfolio used to estimate damage. If part of the change in tonnage was reasonably attributable to the wrongful act, the customer should not be excluded. That was because in such cases it might be difficult to distinguish between the potential impact of the wrongful act and the impact of the idiosyncratic shock. It could also introduce a significant downward bias in the damages estimate. In summary, I think that in this part of his report Dr Cuchra followed the logic of using a portfolio analysis. The point about a portfolio is that factors specific to individual customers tend to cancel one another out, with the result that the general trend becomes apparent.

[190] The exclusion of customers from the portfolio, Dr Cuchra stated at paragraphs 4.29 onwards, poses a number of challenges. First, in theory no such adjustments are required because they should either have been captured in the counterfactual or should cancel each other out through portfolio effects. Secondly, the nature of the shocks affecting customer behaviour is not always clear and might be complex; accordingly the selection process requires judgment. Thirdly, because of the nature of the intangible assets in question, there is some uncertainty in determining the relative potential impact of a shock and the wrongful act. In practice, it is necessary to balance two factors; on one hand the inclusion of all customers in the portfolio in order to ensure offsetting effects and thus comparability against the counterfactual scenario and avoidance of any downward bias in the damages estimate; and on the other hand, the possibility that idiosyncratic shocks will have a jointly significant, one-directional impact on the decline in sales, resulting in an upward bias. Dr Cuchra stated that factual evidence made available to him suggested that the portfolio of acquired customers had been subject to at least some large, idiosyncratic shocks. Given the asymmetric nature of some of these shocks, he had excluded some customers from the portfolio on that basis. Dr Cuchra considered that a conservative approach, because the excluded customers were characterize by a decline in sales, with the result that selective exclusion can only lead to lower damage.

[191] The exclusion of specific customers was based on information provided by the pursuers about individual customers. That information, and the reasons for excluding individual customers, are set out in Dr Cuchra's second report at paragraphs 4.39-4.48 and Appendix 1. I do not intend to set out the reasons for excluding those customers in detail. Apart from the specific cases discussed below at paragraphs [194] - [212], Dr Cuchra's evidence on the decision to exclude individual customers was not seriously challenged. The challenge to his evidence was rather to the principle of using a portfolio approach with the exclusion of certain specific customers, and I discuss this point at paragraph [214] onwards. So far as the exclusion of individual customers is concerned, I am satisfied that Dr Cuchra adopted a proper and careful approach, and accept his evidence on this matter.

[192] By excluding the customers that had been subject to significant, idiosyncratic shocks, Dr Cuchra reduced his portfolio of 40 customers to 30 by excluding the 10 customers set out at Table 4.2 of his second report. Dr Cuchra accepted that reducing the portfolio in this way involves an element of judgment (paragraph 4.51). The choice was driven by the nature of the underlying data, as indicating the potential presence of idiosyncratic shocks. In his first report, he had used a somewhat different portfolio of 30 customers. The change between those two portfolios was brought about by additional evidence made available by the pursuers in the period between the production of his two reports. Comparison of those two portfolios of 30 customers suggested, in Dr Cuchra's opinion, that careful, reasonable variations in the portfolio of excluded customers did not change the estimate of the damage very significantly. That, he thought, indicated robustness of the damages estimate with respect to reasonable variations in the group of excluded customers.

[193] In order to test the robustness of his method, Dr Cuchra modified the portfolio by excluding a further eight customers, resulting in a reduced portfolio of 22 customers. The further customers excluded are set out at Table 4.3 of his second report. Once again, Dr Cuchra expressed the view that this further modification of the portfolio did not bring about a very significant change in the estimate of damages. On that basis he concluded that the robustness of his choice of portfolio was further supported.

Treatment of Schneidersoehne and Papier Union

[194] One aspect of the portfolio that was sharply in dispute between Dr Cuchra and Mr Overd was the treatment of Schneidersoehne and Papier Union. Both of these were large German paper merchants; before the sale of the brand, Schneidersoehne were by some margin the largest of all Gemini customers. Following the acquisition of the brand by the pursuers, Schneidersoehne's purchases declined sharply, and there remained some concern about the firm's acquisition by Stora Enso. Consequently, the pursuers decided that with effect from January 2007 they would stop supplying Gemini to Schneidersoehne and would supply Gemini in larger quantities to Papier Union instead. Thus the remaining Schneidersoehne business was transferred to Papier Union.

[195] Before I consider the views of the two experts, I should note the important parts of the factual evidence relating to Schneidersoehne. I have already mentioned the views taken by the pursuers prior to entering into the transaction (see paragraphs [138]-[142] above). Mr Parr gave evidence (28 October, 10.13 onwards) that, following the acquisition of the Gemini brand, sales to Schneidersoehne slowed down after the acquisition, but he did not find this surprising given the level of complaints, and in particular the value of complaints; complaints during the five months of the Services Period came to just under £130,000, annualized at £312,000, an increase of 232% on 2004. This could not be attributed to a move to Stora Enso products, because Schneidersoehne had not been able to sell those until September 2006 (10.22). By then the pursuers had lost 90% of Gemini volume, and the damage had been done. Mr Parr went on (28 October, 12.55) to deal with the effects of the Stora Enso takeover. When Stora Enso board was available to Schneidersoehne, from September 2006, there had already been a reduction in Schneidersoehne's orders for Gemini, and this caused great concern to the pursuers; they thought that the brand damage had already taken place. To minimize the damage, the pursuers thought that the best course was to utilize brand exclusivity. If the brand were placed with an alternative stockist, Papier Union, on an exclusive basis, that would significantly reduce the damage that had already taken place. That is what the pursuers did. If that had not happened, Mr Parr thought that the migration from Gemini would have been rapid; Schneidersoehne had lost confidence in the quality and integrity of the brand.

[196] Mr Sinclair recognized the risk that arose from the acquisition of Schneidersoehne by Stora Enso (29 October, 13.50). He stated, however, that the pursuers were convinced that Gemini was a strong brand in the German market Schneidersoehne had invested heavily in the product, which was profitable. There was no reason for them to compromise that. Moreover, the Papyrus companies had been acquired progressively by Stora Enso, and several years later they were still stocking Gemini and other non-Stora Enso products. In a visit report prepared by one of the defenders' employees, and seen by the pursuers as part of their due diligence process (production A359, spoken to by Mr Sinclair at paragraph 68 of his written statement), it was narrated that the Papyrus group saw the defenders as a strategic partner in the SBS sector. Mr Sinclair explained (29 October, 13.54) that he was not surprised at the contents of that report. Paper merchants were out to make their own profits, and those profits came from alternative suppliers, not just the parent company. Mr Sinclair had had discussions with Schneidersoehne following the acquisition of the Gemini brand by the pursuers; he regarded it as an immediate priority to discuss the acquisition with customers and end users and to describe how it was to progress. Schneidersoehne were at the top of the list of customers. He described Schneidersoehne's response as "very positive". He had gone to see Wolfgang Aliochin, their vice-president, supply, accompanied by Mr Don Munro, the pursuers' chairman, and Norbert Spiegel, their German sales manager, in June 2005. They had listened carefully to the pursuers' explanations as to why the acquisition of the brand was a good thing for both Schneidersoehne and the pursuers. Schneidersoehne had not expressed any concern about the specification of New Gemini, then or subsequently. Moreover, Schneidersoehne had carried out two days of print trials with New Gemini, and commented that they preferred it to the defenders' product because it printed better (Mr Sinclair, written statement, paragraph 77). Nevertheless, over the next 10 months, from June 2005, a lot of problems arose with Schneidersoehne as a result of products supplied by the defenders. That appeared to influence Schneidersoehne's attitude to the Gemini brand very significantly. During subsequent visits Mr Sinclair and other representatives of the pursuers had found themselves talking about complaints and quality problems rather than the development of the brand. One of the earliest examples of this was a visit by a representative of the pursuers' German sales team to Schneidersoehne on 5 October 2005 (production B596, referred to in Mr Sinclair's written statement at paragraph 87 and in evidence on 30 October at 11.11).

[197] Mr Sinclair further gave evidence about the difficulties involving Schneidersoehne that followed a serious delamination complaint (5 November, 11.33; production C898). Following the initial complaint, Schneidersoehne wanted to know which further orders from them could be affected by delamination. Mr Sinclair commented that this was an absolutely correct inquiry, and the defenders had not provided the information to deal with it. Schneidersoehne still had 300 tonnes of Gemini produced by the defenders in their warehouses, and if the potentially defective product could not be identified they would require to block all material for sale. A commercial settlement was eventually reached, in May 2006 (5 November, 11.59 onwards); the pursuers felt that they had no other option if they were to preserve the brand. Finally, Mr Sinclair gave evidence about Schneidersoehne's decision to switch from Gemini to Stora Enso products (written statement, paragraph 428; 5 November, 2.00 onwards). He stated that he had spoken at some length to Mr Aliochin, to discover why orders had fallen so much and so quickly. Mr Aliochin had said that Schneidersoehne felt that they had not had the consistency of product from Carrongrove. After the complaints in the Services Period it would be difficult to convince his sales staff that things would change once the pursuers took over. Thus it was easier for him to take the simple decision of moving to the board supplied by Schneidersoehne's parent company, Stora Enso. In evidence, Mr Sinclair explained that the discussions with Mr Aliochin had taken place over a period, most recently a few weeks before the proof started. Thus quality issues had an impact on purchasing at Schneidersoehne. Because of the fall in orders, in September 2006 the pursuers reluctantly took the view that they should no longer sell Gemini to Schneidersoehne but give the brand to Papier Union on an exclusive basis; otherwise the pursuers would be left with Schneidersoehne focusing on Enso board and their sales would decline. They had to make sure that they had a committed stockist in order to maintain sales of Gemini in the market.

[198] Three other witnesses gave evidence about Schneidersoehne. Mr Hasecker explained the switch to Papier Union from the latter company's point of view (written statement, paragraphs 71, 72, 74; 4 November, 11.30). He explained that, in view of the switch by Schneidersoehne to a Stora Enso product, there was a risk that both the pursuers and Papier Union could lose; Stora Enso had informed Papier Union that they would not supply one particular type of SBS board to them because they were supplying it exclusively to Schneidersoehne. For that reason Papier Union accepted the switch to Gemini. In this way the pursuers were able to make the best of a difficult situation; Mr Hasecker also stated (witness statement, paragraphs 67-68) that Papier Union's business with the pursuers had been damaged by the complaints about Duocard (Papier Union's own version of Gemini) manufactured by the defenders during the Services Period.

[199] Mr Wallace (12 November, 12.58) stated that Schneidersoehne's total sales as a merchant were in excess of 1,000,000 tonnes per annum. Gemini accounted for just over 7,000 tonnes per annum. Thus it came to 0.7% of Schneidersoehne's sales. Mr Wallace thought that sales of Gemini would be profitable to Schneidersoehne, in much the same way as sales of Trucard to Deutsche Papier had proved profitable to the latter company. In addition, the pursuers thought that if Stora Enso tried to change Schneidersoehne's sales in the short term, they would concentrate on high-volume commodity grades rather than Gemini. That would have given them the opportunity to make bigger returns. In addition, Stora Enso could not manufacture the entire Gemini range. Thus if Gemini were replaced, Schneidersoehne could not achieve all of the sales that had been made of Gemini. From his knowledge of other merchants owned by Stora Enso, Mr Wallace stated that, if a merchant is profitable, it will not necessarily be forced to sell Stora Enso's brand.

[200] Mr Dougan (19 November, 11.22 onwards) gave evidence about a claim, no 12-323/05, made by Schneidersoehne on 10 March 2006 in relation to delamination suffered by an end customer. He stated that salespeople at Schneidersoehne were panicking because they were getting so many complaints. In relation to the particular complaint, Schneidersoehne was concerned because the paper from the warehouse had failed twice, with the end user present at the press. This was embarrassing for the printer, and it had been necessary to effect a commercial settlement. The product in question was tested, using Scott Bond tests, and the quality was found to be very poor. I should add that this was not the only complaint from Schneidersoehne discussed by Mr Dougan in his statement and evidence; it was clear to me that Schneidersoehne had made a substantial number of complaints that were, on proper investigation, found to be justified.

[201] Mr Overd was of opinion that Schneidersoehne should be left out of any calculation of loss because of the specialties of its position. He accordingly conducted his sensitivity analysis of Dr Cuchra's calculations by omitting Schneidersoehne. His position was summarized at paragraph 61 of his second report, where he pointed out that Schneidersoehne was the single biggest customer before the acquisition. Schneidersoehne's average purchases in two years prior to acquisition were reported in Dr Cuchra's table 4.1 as 1,724 tonnes per quarter. The figure dropped by 977 tonnes to only 747 tonnes per quarter for the two years after the alleged conduct. That was the single largest loss of volume by any customer reported in that table. In addition, Schneidersoehne was acquired by Stora Enso and became part of Papyrus, Stora Enso's merchant business. Mr Overd then stated:

"The clear conclusion to draw from this evidence is that it is highly likely that Stora Enso instructed its subsidiary to purchase in-house rather than from its competitor Tullis Russell. The loss of this business was therefore most likely unrelated to the alleged conduct".

Mr Overd went on to point out that Dr Cuchra had excluded other Papyrus businesses on precisely those grounds. Moreover, the pursuers' internal documents indicated the risk that the Stora Enso acquisition posed. Given its importance, he would have expected Dr Cuchra to have asked for and reviewed all relevant internal documents from the pursuers relating to Schneidersoehne, and to have undertaken a detailed review of public information relating to the company. He thought that the absence of consideration of these factors was a major flaw in Dr Cuchra's analysis.

[202] Those views were considered by Mr Wallace in his evidence (13 November, 2.39 onwards). He stated that sales to Schneidersoehne had dropped by 32% in the period from January to June 2006. The pursuers believed that Schneidersoehne had switched some sales in that period to a MeadWestVaco product as a result of complaints received on Gemini. The reason is that they would wish as a merchant to maintain their sales to customers. Once they received complaints about Gemini and had difficulty in resolving them, Schneidersoehne's own sales staff would have offered customers an alternative product to ensure that they retained the customer's business. Moreover, the pursuers' discussions with Schneidersoehne prior to the acquisition of the Gemini brand but after the takeover by Stora Enso had been announced indicated that they had no intention of moving from their position as a Gemini stockist. (Mr Sinclair, who conducted the conversations with Schneidersoehne, also gave evidence to that effect). Moreover, the pursuers had in their internal calculations assumed that Schneidersoehne business might be lost after two years, not immediately. In fact the drop in sales was immediate.

[203] Mr Overd had concluded that Stora Enso had instructed its subsidiary to purchase in-house. Mr Wallace did not understand how Mr Overd could have come to that conclusion. As mentioned above, Schneidersoehne's sales of Gemini amounted to 0.7% of their total sales. Stora Enso would not have focused on that part of the business; instead, a higher priority for them would have been the basic commodity grades of paper and board sold by Schneidersoehne. In any event, Stora Enso could not manufacture the full range of Gemini products. In these circumstances they would not have dropped a large amount of Gemini business immediately. I found Mr Wallace's reasoning on this point to be extremely powerful. It seemed to me that Mr Overd's opinion that the fall in business was attributable to an instruction from Stora Enso to be speculative at best and improbable in reality. In my view this seriously undermines his views about the treatment of Schneidersoehne.

[204] Dr Cuchra disagreed with Mr Overd's approach. He reiterated (second report, paragraph 4.58) that it was important that any significant idiosyncratic shocks can be reasonably assumed to explain most of the observed performance in sales to the relevant customer. In his opinion, where at least part of the change in tonnage can be reasonably attributed to the wrongful act, it is not appropriate to exclude a customer. That is because in such cases it can be difficult to distinguish between the impact of the wrongful act and that of the idiosyncratic shock. It also introduces the possibility of a significant downward bias in the damages estimate. In addition, to preserve the portfolio effects and potential linkages in sales between different customers, related customers should be treated in the same way. Finally, Dr Cuchra thought that account should be taken of any mitigating factors that might turn out to offset any potential impact of the idiosyncratic shock.

[205] Dr Cuchra considered that treatment of Schneidersoehne illustrated the above considerations. Information provided by the pursuers suggested that Schneidersoehne were the defenders' biggest customer and had been responsible for building the Gemini brand in Germany. Schneidersoehne were acquired by Stora Enso shortly before the acquisition. The pursuers did not consider that Schneidersoehne would switch its supplies to Stora Enso for two years. The pursuers had also indicated that paper merchants taken over by paper manufacturers often continue to sell products from other competing producers. (The latter point was illustrated by the example of the Papyrus group, who continue to sell Gemini even after they had been taken over by a major paper manufacturer, and also by Schneidersoehne itself, which continued to stock paper supplied by suppliers other than Stora Enso: see paragraph [146] above). Consequently the takeover by Stora Enso could not be seen by itself as an exceptional customer-specific shock. In addition, the pursuers intended to target Schneidersoehne specifically. That could act as a mitigating factor on any potential effects of the shock. The evidence from the pursuers, however, was that they spent so much time dealing with Gemini complaints that they were unable to promote and service New Gemini as well as they wanted. For this reason Dr Cuchra thought that it was reasonable to assume that the defenders' actions had prevented at least some degree of mitigation of the potential impact of the takeover of Schneidersoehne. In addition, New Gemini had been tested by Schneidersoehne and found entirely satisfactory (indeed even better for printing purposes); this point was spoken to by representatives of the pursuers. On that basis, Dr Cuchra thought that there was clear evidence that sales to Schneidersoehne could have been impaired by the defenders' actions. Schneidersoehne experienced 76 customer complaints on board produced at Carrongrove during the Services Period. There was, in addition, evidence that Schneidersoehne's end customers were severely affected by defective quality. Orders from Schneidersoehne fell, and as a result the pursuers made the decision to stop supplying Gemini to Schneidersoehne from January 2007. The pursuers indicated that they would not have made that business decision but for the significant decrease in tonnage sold to Schneidersoehne. It followed that the drop in sales to Schneidersoehne after January 2007 was at least partly mitigated by the increase in sales to Papier Union. For that reason Dr Cuchra was of opinion that those two elements partly offset each other, and that consequently the two customers should be treated consistently.

[206] Dr Cuchra further considered that the evolution of sales to the whole portfolio in 2006 and 2007, which showed a slight increase after the sharp decline, suggested that offsetting and mitigating effects of various shocks had in fact been taking place. Based on all of the foregoing considerations, he concluded that, while there was clearly a customer-specific shock in relation to Schneidersoehne, it was reasonable to expect that its impact could have been delayed by at least two years in the absence of the wrongful act, and the impact would have been uncertain afterwards, in view of various mitigating factors: Schneidersoehne had a close relationship with the defenders and a long history of selling Gemini board, and had invested considerable time and effort into promoting Gemini to their own customers; the pursuers planned to target Schneidersoehne; Schneidersoehne had tested New Gemini and had found it to be entirely satisfactory. Furthermore, in view of the number of complaints relating to supplies to Schneidersoehne, there was clear evidence that sales to that company are likely to have been significantly affected by the defenders' actions. On the balance of evidence, accordingly, Dr Cuchra did not consider that Schneidersoehne met the criteria for exclusion. He therefore included both Schneidersoehne and Papier Union in his portfolios of affected customers.

[207] The treatment of Schneidersoehne is clearly important because it was by some margin the defenders' largest customer. In addition, sales of Gemini to Schneidersoehne fell steeply during the period from the last quarter of 2005 into 2006. Consequently the impact of Schneidersoehne's presence or absence in any calculation is of great significance. On this issue, I preferred the evidence of Dr Cuchra. It seems to me that if a portfolio approach is to be used consistently customers should generally be included even where there is reason to believe that the variation in sales is caused in part by an idiosyncratic shock specific to that particular customer. If a decline in sales appears, on a reasonable assessment, to be caused partly by an idiosyncratic shock and partly by the wrongful act, I think that the portfolio method clearly demands that the customer should be included, on the basis that the method itself tends to cancel out contrary idiosyncratic shocks. No doubt that might be an exception to this in a case where the idiosyncratic shock clearly dominated a decline in sales, but I do not think that Mr Overd adduced evidence to support such a view in the present case. It seems to me that, for the reasons described by Dr Cuchra, it was unlikely that the pursuers would lose all of Schneidersoehne's business for at least two years, and it was probable that a substantial level of business would be retained thereafter. In this connection, I think it important that Schneidersoehne had a long history of selling Gemini and had invested considerably in promoting the brand. It seems to me as a matter of common sense that a paper merchant would not want to drop such a brand, even if it were taken over by another manufacturer. The fact that Schneidersoehne continued to stock coated SBS board manufactured by MeadWestVaco and Burgo, manufacturers independent of Stora Enso, clearly supports such a view.

[208] In addition to the above factors, it is clear that the pursuers transferred a substantial part of Schneidersoehne's Gemini business to Papier Union. As Dr Cuchra pointed out, an advantage of the portfolio approach is that such transfers of business are taken into account automatically. The ultimate result was an increase in sales to Papier Union, although that is entirely consistent with a decline in business to the older Papier Union customers as a result of the defenders' wrongful acts. Finally, in relation to Schneidersoehne, I consider that the number and seriousness of the complaints about board manufactured at Carrongrove during the Services Period are such that it is extremely likely that there would be some effect on future business, and probably a very serious effect. On the balance of probabilities, I consider that that is precisely what happened.

[209] Before I leave Schneidersoehne and Papier Union, I should note certain further arguments presented for the defenders. First, it was pointed out that Papier Union sold Gemini board under their own brand name, Duocard. Consequently, it was said, problems faced by the customers could not damage the Gemini brand in their eyes. In my opinion this is too simplistic. Duocard was essentially a manifestation of the Gemini brand, and if its reputation suffered the effect would be damage to sales of Gemini, under whatever name. Secondly, it was submitted that there was no suggestion in evidence that Papier Union were inclined to cease taking supplies of Gemini for their Duocard product as a result of what happened. In a sense that is clearly true, because ultimately a large part of Schneidersoehne's business was moved to Papier Union. On Dr Cuchra's portfolio methodology, however, that does not matter; a clear advantage of using a portfolio of customers is that both increased and decreased sales are taken into account. Dr Cuchra made it clear that this is particularly important when sales move from one customer to another, and that is precisely what happened with Schneidersoehne and Papier Union. Thirdly, in relation to Schneidersoehne, some reliance was placed on the high value of complaints in the early part of 2005. This, however, was artificially inflated by one claim where the customer ordered the wrong type of board (evidence of Mr Dougan, 20 November, 11.34). Fourthly, it was submitted that the evidence did not establish any connection between the supply of defective products and the decision to move supplies to Stora Enso. In fact direct evidence of reluctance on the part of Schneidersoehne and their customers to take Gemini was led. Mr Sinclair gave evidence to that effect in his written statement (paragraphs 229 and 230). E-mails were available to similar effect (productions E1304 and 1321); these indicated that serious problems existed with Schneidersoehne's customers. Fifthly, evidence had been led from Mr Sinclair regarding conversations that he had had with representatives of particular customers (statement, paragraphs 428-431). In relation to one of these, Mr Wolfgang Aliochin of Schneidersoehne, it was submitted that Mr Sinclair's evidence could not be relied on. That evidence was, however, backed up by e-mail from Mr Aliochin (production H2749). On that basis, I am unable to reject Mr Sinclair's evidence on this matter. I accordingly accept that there was a linkage between the high incidence of customer complaints and the decision to move to board supplied by Stora Enso. Sixthly, the defenders attacked the evidence of Mr Sinclair, and to some extent Mr Wallace, for claiming that a decision to pay 50% of the value of Old Gemini stock held by Schneidersoehne following the end of the Services Period was motivated by the level of complaints experienced by Schneidersoehne. It was submitted that the primary reason for reaching an agreement was the need to remove Old Gemini stocks so that they were not confused with New Gemini supplied by the pursuers, and that the attempt to claim that complaints were responsible for the settlement was misleading. In my opinion that is not a fair criticism of the evidence of Mr Sinclair and Mr Wallace taken as a whole. Mr Sinclair in particular made it clear that the need to remove Old Gemini Stock was an important consideration; that is clear, for example, from paragraph 319 of his statement, where he referred to Schneidersoehne's concern that it would be left with old stock.

Other customers

[210] Mr Overd also criticized Dr Cuchra's treatment of certain other Gemini customers. The first, and perhaps most significant of these, was Scientific Games International. Mr Overd stated (first report, paragraph 61) that he was advised that this customer had always operated a dual-sourcing policy, and was supplied by both the pursuers and the defenders prior to the sale of the Gemini brand. If that was so, Mr Overd thought that the policy would dictate a partial switch of business to a third supplier. That would be unrelated to the defenders' conduct, and would be a typical example of "benign" acquisition churn. Mr Wallace gave evidence (13 November, 2.52) that prior to the pursuers' acquisition of the Gemini brand Scientific Games International had had the pursuers, the defenders and MeadWestVaco, an American mill, as suppliers. The pursuers had expected to be the majority supplier following the acquisition, but sales went down. The pursuers had, however, worked at obtaining business from SGI, and for the last two years, prior to 2009, had been their sole supplier. Immediately following the acquisition, the pursuers' sales to SGI were less than the combined sales of the pursuers and the defenders prior to the acquisition (30 November, 2.28).

[211] Mr Dougan also gave evidence about Scientific Games International (written statement, pages 84-86; 18 November, 3.55). He referred to delamination claims that they had made, and in particular three delamination claims which amounted to £92,500.73 in total. These were settled on what Mr Dougan described as a "realistic" basis at an amount £16,000 below the original claim figure. In the course of processing these claims Scientific Games International corresponded with the defenders, and had received extremely unpleasant letters. Mr Dougan stated that Mr Paul Bosworth, SGI's logistics manager, described the correspondence as "nasty", and said that he could not believe some of what was said by the defenders. In one letter, dated 23 February 2006 (production E1462), proceeding in the name of Mr Roland MacLeod had actually composed by Mr Walker, the defenders had stated:

"My Board takes a very serious view in relation to claims which are not made with good faith and in this connection we must for the record express our disappointment that after working together for so long you have been unable to support your claim in a fair and professional manner".

It is easy to understand the adverse reaction that such a letter clearly produced in SGI.

[212] In the foregoing circumstances I am not persuaded that any dual sourcing policy had a significant impact on the sales of Gemini to SGI. This was a case where the defenders had accused the customer of dishonesty, and that also supplied them with substantial quantities of defective product. The fact that the pursuers were able subsequently to restore their position, and indeed to become SGI's sole supplier, supports this view, because it suggests that any dual sourcing practice was not a matter of fundamental policy, but could be changed.

[213] In their submissions the defenders advanced further argument in relation to SGI. They submitted, under reference to productions B633 and H2738 that in November 2005 SGI had intimated that they intended to split the 45% of the requirements that they had previously sourced from the defenders between the pursuers and their other supplier, MeadWestVaco. That would increase the pursuers' share from 45% to 65-70%. The sales data, however, demonstrated that the pursuers obtained sales equivalent to 50% of the volumes formerly sold by the defenders (595 tonnes of Gemini products in 2006, as against 1,040 tonnes of Gemini sales in 2004). That suggested that the sales to SGI were exactly what was predicted, owing to the specific purchasing decision that the latter company had made. In fact Dr Cuchra appears to have taken account of precisely those considerations. SGI are considered at page 84 of his second report, where he points out that following the acquisition the pursuers supplied approximately 50% of SGI's requirements but would have expected to supply "at least 70%". Those figures are similar to the figures advanced by the defenders in their submissions.

[214] Mr Overd also referred in his first report to three other Gemini customers, Trekbrook Papers, Slater Harrison and McNaughton. In relation to Trekbrook Papers, he pointed out that the owner had died in April 2004, shortly after the Services Period. While this had not been mentioned in Dr Cuchra's first report, it was referred to in the second report (pages 84-85), and Trekbrook was excluded from the modified portfolio of 30 customers. In relation to Slater Harrison, Mr Overd stated (first report, page 14) that the company reduced the demand for coated SBS board after a key customer had switched to uncoated board because of price. In Dr Cuchra's second report (page 84), it is stated that Slater Harrison received periodic orders from customers which require coated SBS board and can replace these with any one of a number of suppliers. On that basis, I do not think that the decision by one customer to switch to a different kind of board can be regarded as more than an ordinary incident of Slater Harrison's dealings. For that reason I think that Dr Cuchra is justified in keeping them in his modified portfolios. In relation to McNaughton, Mr Overd stated that he was advised that the customer reduced purchases owing to a move to folding box board, with the result that the loss of business should be considered as normal business churn. It appears to me that such changes are part of the normal development of a business, and cannot be considered idiosyncratic shocks sufficient to take the customer out of the list of affected customers. Indeed, in relation to a market share analysis, any general move from SBS board to folding box board should be taken into account by general market movements. In any event, the use of a portfolio analysis has the effect of offsetting relatively minor shocks of this nature. I should also note that at the end of his evidence in chief Mr Swain, who was the technical manager of a McNaughton company, was asked if there was any long-term effect and replied that he did not think that there was. The pursuers' claim, however, is essentially short term.

[215] A further customer identified by the defenders as presenting special features was Koelle Etiketten. This company manufactured labels for tea bags. The submission was that Koelle Etiketten had ultimately decided not to purchase New Gemini from the pursuers because it did not meet their unique specification (production H2735A). The evidence of Mr Sinclair and Mr Wallace, however, was that there was nothing inherently wrong with New Gemini, which was purchased by the largest German manufacturer of tea bag labels. In addition, they gave evidence that the major reason for the loss of the Koelle Etiketten business was that there had been a dispute over the rebate due to Koelle Etiketten, which had resulted in serious bad feeling because of the defenders' intransigent attitude. For the defenders it was submitted that that evidence was wholly without foundation; Koelle Etiketten were entitled to a rebate if they purchased 600 tonnes during 2005, and they failed to do so; reference was made to production C854. It is clear from the latter production, however, that Koelle Etiketten had purchased 560 tonnes of Gemini from the defenders during the 10 months or thereby down to the end of the Services Period. Obviously they could not purchase Gemini from the defenders thereafter. If their purchases are extrapolated on an annual basis, it is clear that he would have exceeded 600 tonnes, and their claim was made on that basis. That does not appear to be to be in any way unreasonable, and accordingly I am not willing to dismiss the evidence of Mr Sinclair and Mr Wallace on this matter. In addition, there was no direct evidence as to the reason for the loss of the Koelle Etiketten business. I am not prepared to conclude that the pursuers were unable to meet Koelle Etiketten's specification, and it does seem to me that the dispute about the rebate is likely to have been the major reason for the loss of business. I accordingly conclude that Dr Cuchra was justified in retaining Koelle Etiketten within his portfolios. Indeed, given the significance of the dispute about the rebate, excluding this customer would produce a significant bias in the defenders' favour.

Conclusion on choice of portfolio

[216] Dr Cuchra ultimately favoured the portfolio of 30 customers described above (at paragraph [189] onwards), but he performed the calculations in his second report on the basis of each of the three portfolios, of 40, 30 and 22 customers. Overall, I am of opinion that his preference for the portfolio of 30 customers was appropriate, and that he had properly selected the customers within that portfolio (and also in the portfolio of 22 customers). I formed the view that he had taken considerable care in considering which customers should be excluded because they had suffered idiosyncratic shocks. He had, in particular, examined the evidence in detail and discussed it with the pursuers, and he had in my opinion used his judgment in an appropriate manner to decide which customers should and should not be included in his portfolio. I will accordingly proceed on the basis that damages should be calculated on the basis of the portfolio of 30 customers, but having some regard to the alternative portfolios of 40 and 22 customers.

Disagreements between experts

[217] (i) Portfolio approach.

Perhaps the most important difference between the approaches followed by Dr Cuchra and Mr Overd was that Dr Cuchra preferred to follow a portfolio approach, whereas Mr Overd favoured an analysis on a customer-by-customer basis. I have already considered Dr Cuchra's reasons for preferring a portfolio approach. I find them powerful. By contrast, Mr Overd's preference for a customer-by-customer basis appears to be open to criticism. In particular, it fails to take adequate account of linkages between customers, which could have a major effect on the overall result. In addition, the portfolio method has the great advantage of automatically cancelling out customer-specific shocks, provided that these are not idiosyncratic. Moreover, adopting a customer-by-customer approach appears to me to be largely impractical. Mr Overd set out his reasons for preferring such an approach at paragraph 21 of his second report, where he stated that, in the light of the ambiguity associated with the interpretation of customer churn, the only reliable approach to identifying business lost as a result of the alleged conduct is to use clear documentary evidence to justify the inclusion of a customer in the set of affected customers instead of selectively excluding certain customers as Dr Cuchra had done. He described his approach as "starting from zero and adding in on a case-by-case basis". In a case such as the present, where, according to the evidence, not all customers wished to discuss the decisions that they made, it would I suspect in practice be quite impossible to obtain a comprehensive view of which customers transferred business because of quality problems. Likewise, I suspect that it would be impossible to obtain documentary evidence from customers, especially those situated overseas. A further critical argument against Mr Overd's view is that in many cases the pursuers' customers would not know what the causes were of lost business for the simple reason that the decisions as to what material to buy were made by their customers, printers and end users. A printer might, for example, have had a bad experience with Gemini and might accordingly have decided to switch to another brand of board. The merchant might be wholly unaware of that fact; even if the order for another board were placed with him, he might not be told the reason for the choice of supplier. In any event it is possible that the merchant would probably not have documentary evidence of the reasons for the change in product.

[218] In addition, Mr Overd accepted that a portfolio approach could be used to estimate loss of profits. He thought that it was best suited for cases where the sample was sufficiently large so that the specific characteristics of one customer did not distort the remainder of the sample (7 May, 12.09). In the present case, of course, Schneidersoehne represented a large part of Dr Cuchra's sample of customers, and for reasons discussed above Mr Overd favoured excluding it. Ultimately, the difficulty with Schneidersoehne is its size: if it is included, there is a risk of distortion; if it is excluded, however, it seems to me that that must also be a risk of distortion because a specific and major example of loss of sales is excluded. In my opinion the risks attendant on including Schneidersoehne outweigh the possible disadvantages, for the reasons discussed above. Moreover, the fact that Schneidersoehne sales were transferred in large measure to Papier Union illustrates very clearly one of the principal advantages of a portfolio approach. For all the foregoing reasons I conclude that Dr Cuchra was justified in adopting a portfolio methodology in the manner described in his report.

[219] Mr Overd produced three charts (production 109) based on charts prepared by Dr Cuchra; they showed the performance of Dr Cuchra's three portfolios, of 40, 30 and 22 customers, over the period from the beginning of 2003 to the end of 2007, on a quarterly basis. He was cross-examined on these (12 May, 10.40). He accepted that during the period from the first quarter of 2006 to the fourth quarter of 2007, the top line on the charts based on 40 and 30 customers was relatively smooth, and that no major shock or variability was shown in that period. That was so despite the fact that the Schneidersoehne business had been lost during that period, in the first quarter of 2007. In the chart based on 22 customers, however, the variations on the line became significantly more marked during the same period. As the size of the portfolio went down, Schneidersoehne and Papier Union, being large customers, had significant effects. Those effects were not seen, however, in larger portfolios. In my opinion this evidence is important as illustrating the portfolio effect that was relied on by Dr Cuchra, whereby idiosyncratic shocks affecting different customers tended to cancel one another out. That phenomenon was more marked when a larger portfolio was used. This example indicates that portfolios of 40 and 30 customers were generally sufficient to reduce significantly the effect of individual idiosyncratic shocks. That in my opinion provides strong support for the General portfolio approach taken by Dr Cuchra.

[220] (ii) Acquisition effects.

In his two reports and in evidence Mr Overd placed great stress on the significance of acquisition (or merger) related effects, which he thought were likely to affect sales. This could take a variety of forms: a Gemini customer might not want to deal with the pursuers, or might object to the change in specification, or might have other specific reasons for not transferring their business to the pursuers. Dr Cuchra's response to this was essentially twofold. First, as explained above, he excluded a substantial number of Gemini customers from the portfolios that he used for his calculations; the original portfolio of 40 was reduced to 30 or to 22 on the basis that the excluded customers were subject to particular idiosyncratic shocks. Some of these (for example Papyrus Belgium Papier NV/SA and Papyrus BV, both of which were excluded from the portfolio of 22 customers) were companies that demonstrated acquisition effects. Secondly, Dr Cuchra considered that the use of a sufficiently large portfolio would tend to exclude acquisition effects, in that idiosyncratic shocks affecting the customers in the portfolio would tend to balance one another out. He explained these points in an important passage in his evidence (5 May, 12.16 onwards). He began by stating that, if there were no asymmetric shocks he would use the whole portfolio of 40 customers. In reducing that number to 30, he only excluded customers for whom tonnage fell. Consequently he had assumed that idiosyncratic shocks could only lower damage, and the result was that reducing the portfolio could only result in an underestimate of the damage. Many of the shocks were to a degree related to the acquisition. Consequently, by excluding customers and thus reducing the damage by more than half (as shown in table 5.7 of the second report), he made quite a substantial drop in tonnage on account of the merger itself. This was one-sided, but addressed possible problems arising out of the acquisition and any possible negative impact.

[221] In their submissions the defenders relied on a number of customers as demonstrating acquisition effects. Two of these, Scientific Games International and Koelle Etiketten, are dealt with above at paragraphs [207]-[210] and [212]. For the reasons discussed there, I am of opinion that these do not demonstrate acquisition effects beyond those that might reasonably be regarded as cancelled out by the use of a portfolio analysis. Papyrus Belgium Papier NV/SA and Papyrus BV were also founded on; following the acquisition of the Gemini brand by the pursuers these two companies re-evaluated their position and decided to drop Gemini. This does seem to me to be a valid criticism of reliance on these two companies, but they were both excluded from Dr Cuchra's portfolio of 22 customers and their overall effect cannot have been great. In their submissions the defenders also rely on certain other customers as demonstrating acquisition effects, but all of these were excluded from both of Dr Cuchra's reduced portfolios.

[222] In his second report Dr Cuchra discusses acquisition effects suggested by Mr Overd at paragraphs 4.16 onwards (under reference to paragraph 53 of Mr Overd's first report). Dr Cuchra was of opinion that some of the examples discussed by Mr Overd were not truly examples of exceptional shocks; nor were they evidence that an acquiring firm will not inherit all of the acquired customers. He considered that the explanation given by Mr Overd for such cases tended to be one directional. An example was that Mr Overd had suggested that third parties might specifically target acquired customers, but he ignored the possibility that the acquirer might target acquired customers in order to obtain their other business. Papier Union was an example where this occurred in practice. Prior to the acquisition Papier Union had only taken two sided coated board but took single sided board from Stora Enso; after the acquisition they took both types from the pursuers. Because of the use of a portfolio approach, however, Dr Cuchra did not consider it appropriate or practical to make adjustments for these factors in specific cases. In cases where large idiosyncratic shocks occurred, however, an adjustment was appropriate, and that is precisely what he had done. That applied to cases where the pursuers had raised prices to a particular customer beyond what could have been expected in the normal course of business, or were unable to supply product due to price or product specifications.

[223] For the pursuers it was submitted that the ultimate customers, end-users and printers, are aware of the brand rather than the producer; thus Mr Tschoner had stated that he would tell customers about the product, not the producer. The defenders had not suggested to any witness that the change of supplier would have or could have had any effect on the perception of the brand in the market. In my opinion there is considerable force in this argument; the point of developing a brand is that customers, especially the printers and end users, purchased the brand because they regarded as having a reliable reputation. The pursuers also referred to the defenders' failure to call witnesses on acquisition effects, in particular Dr Kellie, who provided a written statement which was to some extent looked at by witnesses, and Mr Mason, a non-executive director of the defenders and director of Robert Horne, a Gemini customer. This too seems to me to be a valid criticism of the defenders' position.

[224] In addition, evidence was available that the pursuers intended to take and took steps to ensure that existing Gemini customers were informed about the merger in detail and that any concerns they had were taken into account. That would obviously serve to keep acquisition effects to a minimum. No contrary evidence was led on that matter. Furthermore, a significant amount of evidence was available that the specification of New Gemini was successful with customers. Trials went well, and did not result in adverse comment. (See paragraphs [148]-[149] above).

[225] Overall, I am satisfied that Dr Cuchra has made adequate allowance for acquisition effects in his methodology. In reaching this conclusion, I attach particular significance to the passage of evidence referred to in paragraph [217] above. In that passage he made it clear that he made substantial adjustments in his portfolio to adjust for possible acquisition effects, and in doing so he thought that he had if anything underestimated the loss of sales.

Defenders' further criticisms of Dr Cuchra

[226] In their submissions the defenders made a number of further criticisms of Dr Cuchra's second report. First, they submitted that Dr Cuchra's report failed to take account of and remove from consideration the reduction in sales that was attributable to the sale of the Gemini brand to the pursuers. Comparisons with portfolios of the pursuers' customers were misleading because they had not been subject to the change in supplier, sales force and product that affected the former customers of the defenders. The answer to this point in my opinion is that Dr Cuchra did examine the causal link between the alleged wrongful conduct and the drop in sales, and considered the extent to which acquisition effects were relevant. Moreover, so far as comparisons with portfolios of the pursuers' customers were concerned, I am satisfied that New Gemini was almost universally perceived in the market as the equivalent of Old Gemini, that the most important sales force consisted of customers' own staff, who of course did not change, and that the pursuers had a good reputation in the market. These are all factors that would tend to reduce the acquisition effects. The defenders criticized Dr Cuchra's statement (second report, paragraph 2.29) that, in view of the evidence of poor customer service and customer dissatisfaction, it was reasonable to expect that customer relations would be impaired and sales would be negatively affected. That was said to be a mere assumption. Nevertheless, I am satisfied that there is a large amount of actual evidence to that effect; this is discussed at length in my consideration of the defenders' breaches of contract.

[227] The defenders then submitted that Dr Cuchra, at paragraphs 2.32-2.38 of his second report, had proceeded on the basis of a number of matters that were not borne out in evidence. That amounted to a misrepresentation of the factual position which removed the foundation for the conclusions reached. The particular points made by the pursuers related to Dinkhauser, the raising of invoices by Schneidersoehne, the desire of Papier Union to return stock, Koelle Etiketten and MAP Spain. In each case, I am satisfied that evidence existed to justify the various matters referred to by Dr Cuchra. The central point, however, is that the incidence of claims increased dramatically in respect of board produced during the Services Period. The evidence established in my view that this was liable to lead to a fall in sales. This would not necessarily occur as a result of policy decisions by merchants; it was likely to occur as a result of individual purchasing decisions by their customers, both printers and end users. Moreover, the evidence established that a very decided fall in sales and did occur between the fourth quarter of 2005 and the second quarter of 2006. This is brought out very forcibly in production 109, a graph that indicates quarterly sales of Gemini in the three portfolios considered by Dr Cuchra (40, 30 and 22 customers). The fall in sales can be seen clearly. Thereafter sales level out. The timing suggests that something happened in late 2005. The two candidates put forward are the defenders' breaches of contract and acquisition effects. The evidence of the former was strong and compelling; the evidence of the latter appeared to me to be much weaker. In all the circumstances I conclude that the likely cause is the defenders' breaches of contract.

Estimation of tonnage lost through defenders' wrongful acts

[228] The next stage of Dr Cuchra's calculation involved an estimation of the tonnage lost as a result of the defenders' wrongful acts. This was carried out in Section 5 of his second report, which contained substantial revivals of the analysis in his first report. The revivals were partly made in order to address comments in Mr Overd's first report, and also took account of revised data made available by CEPI. In his first report Dr Cuchra used four distinct methods to estimate last tonnage, but he dropped one of those, a control group analysis, in the second report. He decided, largely accepting criticism by Mr Overd, that this method of calculation was very similar to the historical average method, and that the result of using both methods was to over represent similar estimates and data. To preserve a conservative approach, he thought it better to leave out the control group analysis. I regard this decision as illustrating an openness of approach and lack of dogmatism on Dr Cuchra's part. It also illustrates his concern to prepare a conservative estimate of damage. I intend now to describe the three remaining methods used by Dr Cuchra, and then to consider Mr Overd's criticisms of them and Dr Cuchra's reply. The three remaining methods used by Dr Cuchra were as follows:

[229] (1) Direct analysis
This method involves estimating the counterfactual sales for each customer on an individual basis. Three steps are involved: first, customers who might be expected to reduce their orders as a result of the defenders' conduct are identified; secondly, the counterfactual tonnage of paper that would have been sold to those customers in the absence of the wrongful act are estimated, based on historical data; and thirdly, the lost tonnage is estimated as the difference between the counterfactual and factual scenarios, controlling for exogenous factors that might have affected individual customers independently of the defenders' conduct. The counterfactual tonnage in the absence of the wrongful act (the second step) is estimated on two distinct bases. First, average sales per customer for the period from the first quarter of 2003 to the second quarter of 2005 were projected forward at a constant level; this assumed that sales would have remained constant at the historical average from the last quarter of 2005 onwards (the historical average method). Secondly, the historical average until the second quarter of 2005 was taken as a base estimate and adjusted by the market-specific growth rate for coated SBS paper in the customer's country (the market evolution method). That growth rate was taken from the first quarter of 1996 to the fourth quarter of 2007 in order to capture the long-term trend in the market. At the third step, in the case of some customers the difference between counterfactual and factual tonnage could be explained by specific exogenous factors unrelated to the wrongful act. Information about these was provided to Dr Cuchra by the pursuers, with additional information being provided at the stage of the second report. Where that information suggested that exogenous factors might have been the main cause of the reduction in tonnage, the customer was excluded. That explained the reduction from 40 customers to 30 or 22, as discussed above. This factor had the effect of reducing the damages estimate.

[230] In Dr Cuchra's second report, the figures arrived at using this method were as follows (Table 5.1):

	Acquired portfolio (40)	Modified portfolio (22)	Modified portfolio (30)
Historical average method	27,179	13,541	18,409
Market evolution method	17,998	8,441	10,971
Average	22,589	10,991	14,690

In his report Dr Cuchra expressed the opinion (paragraphs 5.40 onwards) that on the evidence this estimation approach provided the best estimate of the damage and was consistent with the overall portfolio methodology.

[231] (2) Statistical difference-in-differences analysis

Under this approach, the counterfactual tonnage for the customers who may have been affected by the wrongful act (the "treatment group") is estimated on the basis of the evolution of tonnage for customers who were not affected by the wrongful act (the "control group"). Thus it is necessary to examine sales to the control group and the treatment group independently, and to do so during periods both before and after the wrongful act. The effects of the wrongful act are calculated on the assumption that but for the wrongful act the treatment group would have behaved in the same way as the control group during the period of damage. The counterfactual is calculated on that basis, and the loss is the difference between that counterfactual and the actual sales to the treatment group. Dr Cuchra described this as a statistical method that is fairly widely used.

[232] In his second report, Dr Cuchra made use of three different treatment groups in calculating the lost tonnage; these were the entire portfolio of acquired customers and the two modified portfolios of 22 and 30 customers. The control group comprised customers that had only purchased from the pursuers. In Table 5.2 he calculated the average reduction in tonnage per customer per quarter. He found that sales to the total acquired portfolio fell by an average of 121 tonnes per customer per quarter, to the modified portfolio of 22 by an average of 39 tonnes per customer per quarter, and to the modified portfolio of 30 by an average of 51 tonnes per customer per quarter. All of these were, he thought, statistically significant at a high level (5% or less). The result was that the lost tonnage over the entire period from the fourth quarter of 2005 to the third quarter of 2008 was as follows:

Acquired portfolio	Modified portfolio (22)	Modified portfolio (30)
48,348	8,635	15,352

[233] (3) Analysis of market shares

Under this approach, the pursuers' counterfactual market share following the acquisition of the Gemini brand is calculated on the basis of the pursuers' and defenders' market share in coated SBS paper before the acquisition. In other words, the counterfactual assumes that following the acquisition the pursuers should have maintained the same market share as was enjoyed by Trucard and Gemini prior to the acquisition. The market in question consists of the eight European national markets in which Gemini and Trucard were sold. The loss of market share caused by the defenders' conduct is calculated as the difference between the counterfactual market share calculated as above and the factual market share that the pursuers achieved following the acquisition. That is translated into lost tonnage by multiplying the lost market share by the market size (the volume of coated SBS paper sold in the market).

[234] Two methods were used to estimate the counterfactual market share. The first was based on the combined market share of the pursuers and the defenders in the second quarter of 2005, the last quarter before the start of the Services Period. That made use of the latest available data prior to the wrongful act. The second was the average combined market share of the pursuers and the defenders estimated over the period of one year prior to the start of the Services Period (third quarter 2004 to second quarter 2005). This used a longer period as the benchmark. This method has the advantage of automatically taking into effect the evolution of the market for SBS coated paper. Dr Cuchra also thought it appropriate to make an adjustment for sales that the pursuers decided not to pursue following the acquisition and for sales to specific customers that did not materialize for other reasons. This involved a downward adjustment to the counterfactual market share. This resulted from the pursuers' intention to drop Gemini sales outside the European market, in particular in North America. The result of that was that, of Gemini sales of approximately 30,000 tonnes per annum in 2004 and the first two quarters of 2005, the estimated Gemini sales following the acquisition were 25,000 tonnes per annum.

[235] In his second report of Dr Cuchra provided revised estimates of lost tonnage based on a market share approach. This resulted in the following estimates of lost tonnage (Table 5.6):

	Combined portfolio of pursuers and defenders	Modified portfolio (22)	Modified portfolio (30)
Analysis of market shares	12,999	4,565	7,888

[236] I will now consider Mr Overd's criticisms of these calculations and Dr Cuchra's responses.

Defenders' criticisms of first method (direct analysis)

[237] Mr Overd agreed that use of the market evolution method was appropriate, but suggested that the historical average method should be disregarded (first report, paragraph 71), on the basis that it failed to allow for changes in market conditions. Failing to allow for changes in market conditions can distort the calculation of lost tonnage. In response, Dr Cuchra defended use of the historical average method, on the basis that it is appropriate to consider a range of approaches to estimating the counterfactual scenario (second report, paragraph 5.8). Historical sales provide an important counterfactual benchmark, in addition to sales in a comparable portfolio and the dynamics of the market. He referred to cases where courts in other jurisdictions (the federal jurisdictions in both the United States and Australia) had made use of a similar method. I agree that it is appropriate to consider such a method, although not exclusively. It seems to me that the advantage of the historical average method is that it takes account of factors specific to the business in question over the period immediately preceding the occurrence of the damage. Merely using the evolution of the market ignores factors that are specific to that particular business. As Dr Cuchra put it (second report, paragraph 5.10):

"Historical sales are relevant because they capture information specific to this portfolio of customers, the potential dependence of future sales on the evolution of past sales..., and the nature of the customer relations in this portfolio".

I accordingly agree with Dr Cuchra that it is appropriate to use both the historical average method and the market evolution method in carrying out a direct analysis of loss. In this connection, I think it important that this is only one of three approaches to the calculation of loss; the advantage of using a number of different approaches is obviously that the eccentricities of any one approach are reduced in significance.

[238] Mr Overd also criticized Dr Cuchra's market evolution method, on four bases. The first of these related to "leading zeros". This problem arose when the first recorded sale to a particular customer did not occur in the first possible quarter but in a later quarter. In such a case, the question arises as to whether the observation of no sale should be treated as zero sales or missing values in the relevant quarters. If the observation is treated as a missing value, it is excluded from the calculations, rather than treated as zero. Dr Cuchra's first report had treated such entries as missing values before the first year of recorded sales and zeros thereafter, applying that approach consistently to all customers, whether of the defenders or of the pursuers. An implicit assumption was that customers could not have been considered as such before the first observed sale. Mr Overd suggested that Dr Cuchra's approach involved an erroneous assumption in dealing with the raw data (first report, paragraph 114). He stated that Dr Cuchra's approach would have been justified if the customers in question had been new customers of the defenders at the time of the first purchase in the recorded data. The defenders, however, had confirmed to Mr Overd that the customers were already customers of the defenders before 2003. Consequently Mr Overd thought that for those eight customers the average pre-acquisition volumes should be computed over all quarters of the pre-acquisition period.

[239] Dr Cuchra's reply to this (second report, paragraph 5.19) was that such an approach assumed that it was possible to determine robustly a date when a relationship with a given customer actually begins. In practice the date is uncertain, as suppliers typically maintain a formal business contact with different customers even if they do not have any sales. In addition, customers may use different suppliers for certain projects. Consequently it is impractical to identify a particular date when a given relationship starts. Dr Cuchra was accordingly of opinion that all leading zeros should be treated consistently, either as missing observations or as zero observations. In view of Mr Overd's comments, Dr Cuchra was prepared to treat all such observations as zeros. If that were done, estimates of lost tonnage would be higher by 2,114 tonnes for the whole acquired portfolio and by 1,330 tonnes for the modified portfolio of 22 customers (on the historical average method).

[240] Mr Overd's second criticism related to the time period that was relevant for assessing the evolution of the market. The question here was whether, as Dr Cuchra contended, a long period (1997-2007) should be used, or, as Mr Overd suggested, a shorter period of slightly over two years (third quarter of 2005 to fourth quarter of 2007). Mr Overd suggested (first report, paragraph 74) that the long-term market trend, as used by Dr Cuchra, was not representative of the actual evolution of the market during the critical period, from the second quarter of 2005 to the fourth quarter of 2007. The use of a long-term trend over more than 10 years took account of changes in market conditions that occurred long before the acquisition (paragraphs 75 and 76). The shorter period preferred by Mr Overd was one during which a significant decline in the market could be observed (Figure 1). Dr Cuchra responded (second report, 5.23) that, in the case of an accelerated market decline, sales to established customer portfolios might prove more resilient than the market as a whole and might follow past trends to a greater extent. Furthermore, if the evolution of the market after the wrongful act has been affected by the wrongful act an endogeneity problem arises. This would occur if, as a result of the wrongful act, customers shifted to non-European manufacturers or to other types of paper. Dr Cuchra felt that this problem would exist to some extent in the present case. He accepted that moving from a long-term to a contemporaneous market adjustment reduces the estimate of lost tonnage: by 4,371 tonnes to 8,441 tonnes for the modified portfolio of 22 customers and by 7,869 tonnes to 17,998 tonnes for the entire portfolio of acquired customers. He thought that this approach might underestimate the damage but considered that it would reflect an overall conservative approach.

[241] Mr Overd's third criticism related to whether the market should be considered at the aggregate level of all eight countries where Gemini was sold, or whether it should be considered on a country-by-country basis. Mr Overd thought that the more appropriate benchmark to adjust the counterfactual for the change in the market during the period from the second quarter of 2005 to the fourth quarter of 2007 was the evolution of the relevant European market (comprising eight national markets) over the same period. That would lead to a much sharper decline in the market trend. In addition, Mr Overd criticized Dr Cuchra as failing to take account of stark differences in market trends across the eight countries considered. Dr Cuchra's reply was that the board market exhibited very important cross-country effects and linkages, so that the market for board was truly a European market. In my opinion that was plainly correct. Indeed, the defenders' list of customers includes large numbers in countries other than the United Kingdom, and it was clear from the factual evidence that it is very common indeed for supplies of board to move across frontiers within the European Union. For that reason I am of opinion that Dr Cuchra's view was plainly correct, and that the eight countries should be treated as a single market.

[242] Mr Overd illustrated his argument by demonstrating a sharper decline in the UK market than in the aggregate of European markets over the period from the second quarter of 2005 to the fourth quarter of 2007 (Figure 2). In his evidence, however, it became clear that the figures that he had used related to production in the various markets, not consumption. That meant that the United Kingdom figure related to the pursuers' and defenders' production, as there were no other producers of SBS board in the United Kingdom. Thus the decline over the period from the third quarter of 2005 can be explained by the difficulties faced by the pursuers following the acquisition of the Gemini brand. That indicates in my view that Mr Overd's criticism on this ground was misplaced.

[243] The fourth criticism related to the choice of growth rate used by Dr Cuchra. The question here was whether the growth rate should be estimated as the compound average growth rate or as an output of a regression analysis of sales on a linear trend. In his first report Dr Cuchra used the compound average growth rate, which is calculated as the geometric average growth rate in sales per quarter between the first and the last observations of sales in the market (first quarter of 1996 and fourth quarter of 2007). An alternative, suggested by Mr Overd, is to calculate a regression growth rate. This involves recreating logarithms of market sales on a linear trend, and such a calculation takes into account all observations in the series. Dr Cuchra described the compound average growth rate as a typical, well-established and widely used measure of growth in business and financial analysis. Its advantage was transparency and simplicity in that it used the first and last observations in a series. Regression analysis was a more advanced technical method whose advantage was that it took into account recorded sales levels between the first and last observations. Dr Cuchra maintained his view that using the compound average growth rate was reasonable, but he thought that it was appropriate to use the alternative approach as well; that had no obvious drawbacks, and was helpful in testing the robustness of estimates. As a result of adopting a regression growth rate instead of a compound average growth rate, the estimate of the lost tonnage increased by 2 tonnes to 8,441 tonnes for the modified portfolio of customers (22 customers), and by 4 tonnes to 17,998 tonnes for the entire portfolio of acquired customers. Dr Cuchra stated that this suggested that the estimate was robust to changes in the method used to estimate growth rates.

Defenders' criticisms of second method: statistical difference-in-differences analysis

[244] In relation to Dr Cuchra's second method Mr Overd questioned two assumptions that underlay Dr Cuchra's use of the method. In addition Dr Cuchra, as a result of the work performed in connection with his second report, reconsidered two other assumptions that underlay this approach.

[245] The first of Mr Overd's criticisms related to the issue of leading zeros, and involved the same issues as discussed above at paragraphs [235] and [236]. In order to test the robustness of his estimates of lost tonnage, Dr Cuchra carried out the calculations using both treatments of leading zeros. The results were as follows (Table 5.3; the modified portfolio was of 22 customers)

	Average reduction in tonnage per customer per quarter		Lost tonnage:Q4 2005-Q3 2008
Treatment group	Acquired portfolio	Modified portfolio	Acquired portfolio	Modified portfolio
Base-case model (with leading zeros)	-121	-39	48,348	8,635
Without leading zeros	-121	-32	48,388	6,937

Thus in the modified portfolio of 22 customers, incorporating leading zeros increases the average lost tonnage per customer per quarter by about 7 tonnes.

[246] Mr Overd's second criticism related to the difference in the size of customers between the treatment and control groups. He pointed out (paragraph 83) that the control group of the pursuers' customers was on average much smaller than the affected (defenders') customers. Using a difference-in-differences approach, an ideal control group consists of customers that are unaffected by the alleged wrongful act but otherwise identical to customers affected by the alleged conduct. If there are important differences, it is questionable whether the control group can be used as a reliable benchmark. As a result of Mr Overd's suggestions, Dr Cuchra introduced an adjustment to take account of the different sizes of customers. Two possible methods existed to achieve this. First, it was possible to estimate the model with order volumes specified in natural logarithms rather than absolute levels, which allows the model to capture proportional market decline and hence to control for differences in the size of customers. Alternatively, it was possible to use a technique known as mean-adjustment by excluding sequentially the smallest customers in the control group until the average level of sales in the treatment group and the control group were broadly equal; that would mean that any proportional market decline would have similar average effects in tonnage levels. The result of using those two methods was as follows (table 5.4):

	Average reduction in tonnage per customer per quarter		Lost tonnageQ4 2005-Q3 2008
Treatment group	Acquired portfolio	Modified portfolio	Acquired portfolio	Modified portfolio
Base-case model (natural logarithms	-121	-39	48,348	8,635
Mean-adjustment	-94	-88	37,676	26,481

The statistical significance of the reduction in tonnage was at the 5% level or better. It follows that mean-adjusting the control group decreases the estimate of lost tonnage by 27 tonnes per customer per quarter for the entire portfolio of acquired customers, and increases the estimate by 49 tonnes per customer per quarter for the modified portfolio of 22 customers. Dr Cuchra observed that significant differences might be expected when comparing these two approaches, since they use different sets of data. Dr Cuchra was of opinion, however, that mean-adjustment had practical difficulties of application, and that it was preferable to use natural logarithms, which avoided these problems. My conclusion on this part of the evidence is that Dr Cuchra's approach was justified.

[247] The third issue, raised by Dr Cuchra, related to differences between the treatment and control groups unrelated to the wrongful act (paragraph 5.65). Dr Cuchra explained that difference-in-differences analysis relies on comparisons between the treatment and the control groups before and after the wrongful act. The validity of these comparisons depends on whether the control group is a useful and appropriate benchmark for the treatment group. In particular, apart from the effects of the wrongful act, both groups must respond similarly to the same factors that influence order volumes over time. Differences between the two groups could introduce bias if these differences also influenced tonnage. Such differences might include the influence of foreign trade or the prevailing economic climate in any particular country. Consequently measures of trends in country GDP, national paperboard market sales and US dollar exchange rates were incorporated by Dr Cuchra into his model as control variables. The fourth issue raised by Dr Cuchra related to the statistical estimator, in other words the technical method of calculation used to estimate the lost tonnage. A number of technical methods existed for calculating an estimate on the basis of any given difference-in-differences analysis. In his first report and in earlier part of his second report he used a so-called "random-effects" estimator. A closely related alternative was a "fixed-effects" estimator. The former, Dr Cuchra stated, can be more precise, but it requires an additional assumption in the data (that any firm-level characteristics constant over time that are not explicitly accounted for in the data must be uncorrelated with factors that are accounted for in the model). Dr Cuchra accordingly prepared a further table to allow for differences in control variables, a "fixed-effects" estimator, and a combination of both of these. It is as follows (table 5.5):

	Average reduction in tonnage per customer per quarter		Lost tonnage Q4 2005-Q3 2008
Treatment group	Acquired portfolio	Modified portfolio	Acquired portfolio	Modified portfolio
Base-case model (no controls, random effects)	-121	-39	48,348	8,635
Control variables	-119	-48	47,520	10,531
Fixed-effects	-121	-39	48,348	8,635
Control variables and fixed effects	-119	-48	47,528	10,661

All of the figures in the first two columns bore statistical significance at at least the 5% level. The result, Dr Cuchra explained, was that introducing control variables or changing the statistical estimator did not reduce the estimate of lost tonnage. The estimates were marginally sensitive to the former and largely insensitive to the latter.

[248] Dr Cuchra's overall conclusion in this part of his evidence (second report, paragraph 5.72 onwards) was that the difference-in-differences analysis suggested that the wrongful act caused an average reduction of 39 tonnes per customer per quarter for the modified portfolio of 22 customers, 51 tonnes for the modified portfolio of 30 customers and 121 tonnes for the whole acquired portfolio. The corresponding lost tonnage was 8,635 tonnes (22 customers), 15,352 tonnes) (30 customers) and 48,348 tonnes (whole acquired portfolio).

[249] In addition to the above criticisms, in his first report Mr Overd introduced certain stress-tests to Dr Cuchra's analysis (Table 2, at paragraph 135). These stress‑tests involved the exclusion of Schneidersoehne, changes to the control group and changes to the regression specification. Schneidersoehne is discussed above. So far as the control group is concerned, Mr Overd noted that Dr Cuchra's control group consisted of all customers who only purchased from the pursuers prior to the acquisition plus the 11 customers of the defenders who had been excluded from the treatment group. Mr Overd thought that the use of a control group of customers purchasing on average much smaller volumes per quarter than customers in the treatment group had the potential to distort Dr Cuchra's estimates. He accordingly used two alternative control groups. First, he restricted the sample of the pursuers' customers to their 37 largest customers based on pre-acquisition volumes. That was designed to equalize the average quarterly purchase volumes of the resulting control group to that of the treatment group in the pre-acquisition period. Secondly, he used a control group that only consisted of the 30 largest customers of the pursuers prior to the acquisition. Once again the objective was to equalize, in approximate terms, the average quarterly purchase volumes in the pre-acquisition period. In relation to the regression specification, Mr Overd stated that he thought it prudent to allow for differences in the evolution of the counterfactual in different countries. He accordingly used a different regression specification to Dr Cuchra's; this allowed for differences in the average sizes of the control and treatment groups across countries. The result of Mr Overd's analysis, contained in Table 2 and summarized at paragraph 138, was to suggest that Dr Cuchra's estimate of damage under the difference-in-differences of approach was sensitive to changes in the regression specification, the choice of control group customers and the composition of the group of affected customers. In particular, when Schneidersoehne was excluded the lost tonnage estimates became statistically insignificantly different from zero in five of the six combinations of regression specifications and control group in the table. In view of this sensitivity, Mr Overd thought that Dr Cuchra's estimate under this approach provided no reliable basis for concluding that the defenders' conduct had a negative effect on the pursuers' business or for the quantification of any alleged effect.

[250] Dr Cuchra responded to the foregoing criticisms (second report, paragraphs 5.72 onwards). In relation to Schneidersoehne, his position was as set out above (paragraph [194] onwards), and for the reasons stated there I am of opinion that his response is correct. In relation to the composition of the control group, Dr Cuchra accepted that, if the control group contains on average smaller purchasers than the treatment group, that could bias estimates of lost tonnage if the damage is assumed to have relatively different effects on the two groups. Mr Overd adjusted for that by excluding customers from the control group. Dr Cuchra thought, by contrast, that the best way of achieving that was to make use of natural logarithms. So far as the choice of customers in the control group was concerned, Mr Overd had added the defenders' pre-acquisition customers who had been excluded from the treatment group to the control group; they comprised approximately 20% of the control group. Those customers excluded from the treatment group might themselves have been subject to various shocks, including the wrongful acts of the defenders, and in fact sales to these customers had decreased following the acquisition. Consequently the inclusion of former customers of the defenders in the control group might bias the estimates of lost tonnage in a downward direction. Dr Cuchra thought that this could have a significant impact when the control group was small, as was the case with the tests carried out by Mr Overd. If that adjustment was not made, Dr Cuchra stated that the estimates resulting from Mr Overd's stress-tests were higher than Dr Cuchra's own estimates.

[251] It is obviously difficult for a layman to comment on the differences in statistical methods used by the two experts. Nevertheless, it seems to me that Mr Overd's stress-tests were themselves open to some criticism, and on one view might be predisposed to result in a higher estimate of damage than Dr Cuchra's estimate. Dr Cuchra's comments on this last point, namely that including some of the defenders' customers in the control group might produce a downward bias, seemed to me to be well taken; those customers were excluded from the analysis because they were subject to specific shocks, but the were in many cases also subject to the effects of defective quality production during the Services Period and the defenders' antagonistic response to customer complaints. It might be expected that those factors would produce a reduction in sales. I accordingly conclude that Dr Cuchra's estimates of loss produced using the difference-in-differences analysis are sufficiently reliable to use in an overall estimate of the pursuers' damage.

Defenders' criticisms of fourth method: analysis of market shares

[252] In relation to Dr Cuchra's fourth method of calculation, the analysis of market shares, Mr Overd had four criticisms; I will deal with these in turn. First, he criticized Dr Cuchra's treatment of exogenous factors. He suggested (first report, paragraph 143) that Dr Cuchra did not explain why an adjustment was made for exogenous factors only after calculation of the factual and counterfactual shares rather than excluding the volumes to the 11 customers that were considered lost owing to factors unrelated to the alleged conduct. Mr Overd had considered how the alternative of excluding volumes of these 11 customers from the calculations would affect the result. He also tested the effect of excluding sales to Schneidersoehne in addition to those 11 customers. In response, Dr Cuchra (paragraph 5.92) stated that in his first report he had made a downward adjustment of 3,200 tonnes per annum to the counterfactual market share to account for tonnage to unaffected customers who were subject to specific idiosyncratic factors. He considered that that adjustment required to be updated in view of revisions to the portfolios that he used to estimate the damage. So far as the 11 customers who were lost because of factors unrelated to the defenders' conduct, Dr Cuchra responded that it was difficult to determine with any certainty that sales to particular customers were completely unaffected by the wrongful act. Despite this, he carried out his analysis of market shares making a similar adjustment in order to explore any potential impact on his analysis. In relation to Schneidersoehne, his reaction was as discussed above.

[253] Secondly, Mr Overd changed the period for the calculation of the counterfactual market share to the full pre-acquisition period running from the first quarter of 2003 to the second quarter of 2005 (paragraph 145). That was the reference period that had been used by Dr Cuchra for the customer-by-customer approach and the difference-in-differences analysis. On this point, Dr Cuchra stated (paragraph 5.102 onwards) that the choice of time period should take into account the advantages and disadvantages of longer-term relative to shorter-term historical averages. Longer-term averages have a smoothing effect in relation to exceptional factors, but they give a relatively lower weight to the most recent and hence most relevant information. When analysis is conducted at the level of market shares, the data is expected to be relatively less volatile, and consequently the advantages of using long-term historical averages are limited. For that reason more weight should be placed on short-term averages, to reflect the most recent information. This should be contrasted with sales to a given portfolio of customers, where it can reasonably be expected that greater volatility will be demonstrated; thus in such a case it is reasonable to use longer-term averages. When counterfactual market shares were measured over the entire pre-acquisition period from the first quarter of 2003 to the second quarter of 2005, the lost tonnage estimate was 2,655 tonnes. When counterfactual market shares were measured over the year prior to acquisition, from the third quarter of 2004 to the second quarter of 2005, the lost tonnage estimate was 4,920 tonnes. If the second quarter of 2005 was taken by itself, the estimate of lost tonnage increased even further, to 6,618 tonnes. In that situation, Dr Cuchra thought it appropriate to consider both short-term and long-term averages, to strike a balance between recent evidence and potential volatility in the data. Hence he took an average of all three time periods when arriving at a final estimate of lost tonnage.

[254] Thirdly, Mr Overd reran Cuchra's market share analysis at a country level, instead of using total sales across all eight national markets, as Dr Cuchra had done (paragraph 146). Mr Overd thought that market evolution might well differ across countries, making this a more appropriate approach. Dr Cuchra's response (paragraphs 5.108 onwards) was that, while he had estimated counterfactual market share by looking at all eight countries where Gemini was sold, it would be possible to estimate counterfactual market shares and lost tonnage at a lower level of aggregation. The problem with doing that, however, was that it might not capture all of the cross-country linkages in the portfolio, nor reflects the global nature of the Gemini brand. Using an aggregate basis, counterfactual market share increased by 1,335 tonnes to 5,900 tonnes by comparison with the individual country basis. On this point, Dr Cuchra thought that the aggregate basis was better, for the reasons discussed above in relation to the direct approach.

[255] Fourthly, Mr Overd expressed the view that basing a damages period only on the quarters in which the estimation method produces positive lost tonnage estimates is flawed from a statistical perspective (paragraph 147). To test robustness, he included the negative estimates for lost tonnage in the fourth quarter of 2005 in the calculation, and also examined the estimate for tonnage lost over the entire data period after the wrongful conduct, from the last quarter of 2005 to the last quarter of 2007. In response, Dr Cuchra stated (paragraph 5.94 onwards) that in his first report in some quarters the factual market share had exceeded the counterfactual market share, producing negative estimates of lost tonnage. These periods were excluded from the total estimate of lost tonnage if the negative lost tonnage occurred in the first quarter of the damages period (the fourth quarter of 2005) or if the estimated lost tonnage was negative after the final year of positive lost tonnage. The basis for that was that, once sales had recovered, as shown by negative lost tonnage at the end of the period, no more damages could be recovered. In theory other approaches could be used: all periods of negative lost tonnage over the period used to measure damages could be used, or all such periods could be used before the total factual and counterfactual scenarios for the entire portfolio converge, or all periods of negative lost tonnage could be excluded. Mr Overd had suggested that all periods of negative lost tonnage should be included, regardless of when convergence occurs. Dr Cuchra thought that wrong, because convergence shows an end of any losses. Consequently he used the approach of excluding lost tonnage after convergence took place over the entire portfolio, the latter event marking the end of the harmful effects of the defenders' conduct. Nevertheless, under the market-share approach, convergence of factual and counterfactual scenarios could be expected to occur earlier than under other approaches. This occurs because an implicit assumption underlying the approach was that the defenders' conduct could not affect the evolution of the overall market in SBS board; other approaches control for that relationship, at least indirectly. In the light of those considerations Dr Cuchra thought it appropriate to include negative lost tonnage in the estimates of the damage over the period of the wrongful act and to exclude periods of negative lost tonnage once evidence is available that factual and counterfactual scenarios converged. Doing this yielded a lost tonnage estimate of 4,565.

[256] By making the suggested changes Mr Overd considered that he could test the robustness of Dr Cuchra's conclusions. The result of the changes was set out in Table 3 of his report and discussed in a subsequent passage (paragraphs 152-157). Dr Overd found that using the entire pre-acquisition period for the estimation of the counterfactual caused a substantial reduction in the estimate of lost tonnage, to less than half of Dr Cuchra's estimate. A similar fall occurred if the 11 customers excluded by Dr Cuchra from his group of 30 were excluded from market share calculations. When Schneidersoehne tonnage was also subtracted tonnage became negative. If the analysis was performed country by country and the resulting estimates aggregated, total estimated volumes became minimal or negative. Overall, Mr Overd found that making changes in Dr Cuchra's assumptions meant substantial reductions in his estimates of lost tonnage, and combining these changes resulted in negligible or negative estimates of lost tonnage.

[257] Dr Cuchra, after considering Mr Overd's criticisms, concluded (paragraph 5.112) that the appropriate method of estimating lost tonnage under the market share approach was to take into account convergence of factual and counterfactual scenarios in the treatment of negative lost tonnage, using both short-term and long-term averages when estimating the counterfactual market share, and using the aggregate market share in all eight countries. On this basis the estimated lost tonnage would amount to 4,565 tonnes for the modified portfolio of 22 customers, 7,888 tonnes for the modified portfolio of 30 customers, and 12,999 tonnes for the entire portfolio. Dr Cuchra also commented on the various stress-tests employed by Mr Overd in the analysis summarized in his Table 3. Dr Cuchra rejected the exclusion of Schneidersoehne alone, for reasons discussed above. He rejected the use of country-level analysis as against the aggregate figure for all eight markets for reasons previously discussed. In relation to the treatment of negative lost tonnage, Dr Cuchra thought it appropriate to account for convergence between the factual and counterfactual scenarios, on the basis that that represented an end to the pursuers' loss. Consequently he had reduced the estimated lost tonnage by the amount of negative lost tonnage for periods before such convergence occurred. In relation to the adjustment for potential idiosyncratic shocks by excluding certain customers, Dr Cuchra thought it reasonable under a market share analysis to consider estimates with and without the exclusion of certain customers. For his final damages estimates, therefore, he had adopted Mr Overd's approach by adjusting for idiosyncratic factors; he did so by analyzing market shares is based on modified portfolios. In relation to the time period used to estimate the counterfactual market share, he made use of a one-year rather than a three-year average. By taking all of these factors into account, the lowest relevant stress-test result using Mr Overd's figures was 4,053 tonnes. Dr Cuchra's own base case estimate of lost tonnage was 4,565 tonnes under the market share approach for the modified portfolio of 22 customers and 7,888 tonnes for the modified portfolio of 30 customers.

[258] My conclusion on the market share analysis is that, while Mr Overd's criticisms had some validity, they did not establish that the method was inappropriate, and they were in any event taken into account to some extent by Dr Cuchra. For reasons explained above, I agree with Dr Cuchra on the treatment of Schneidersoehne and the use of an aggregate market of eight countries. His approach to negative tonnage also seemed to me to be realistic, at least in the final form adopted, that negative tonnage would be ignored once the convergence of factual and counterfactual had occurred. I agree with him that at that point the loss to the pursuers can be said to have come to an end. Beyond those factors, Dr Cuchra looked at Mr Overd's stress-tests and concluded that the difference from his own analysis, at least on the modified portfolios, was not unreasonably large. In my opinion that demonstrates that the fundamental soundness of his approach has not been destroyed by Mr Overd's calculations.

Defenders' further criticisms of Dr Cuchra's second report

[259] I have attempted to deal in the preceding sections of this opinion with the criticisms of Dr Cuchra which appeared from the evidence of Mr Overd. In their submissions, in addition to dealing with Mr Overd's points, the defenders advanced certain further criticisms of Dr Cuchra's second report. At a general level, they submitted, that the approach followed by Dr Cuchra in his second report, in relying on portfolio effects, inverted the onus of proof in that it presumed that all tonnage lost relative to the counterfactual was attributable to the defenders' conduct unless it was established that all of the lost tonnage is attributable to exogenous factors. They further submitted that the bottom up approach advocated by Mr Overd is consistent with where the onus of proof lies; it was for the pursuers to prove on the balance of probabilities that tonnage was lost as a result of the conduct. I do not think that that criticism is well founded. The concept of burden of proof relates to the proof of the facts in issue, in this case whether and if so to what extent the fall in sales was attributable to the defenders' conduct. The onus of proving that clearly rests on the pursuers. Nevertheless, they may adopt a number of different methods in order to prove those facts. It seems to me that the use of a portfolio methodology is an acceptable method of proving the relevant facts in issue. Indeed, it has a number of clear advantages, including the offsetting of normal shocks in relation to different customers; that was illustrated in Dr Cuchra's evidence in chief (4 May, 2.58 onwards) and cross-examination (6 May, 10.36 onwards). In the latter passage Dr Cuchra explained that the portfolio methodology started with 40 customers. Customers were then excluded where exogenous factors appeared important. Nevertheless, an element of judgment was involved because on occasion offsetting events might occur. It was put to Dr Cuchra that he had assumed that all the change in the tonnage was due to the wrongful act, but he replied that that was not so. He was then asked what would happen if only part of the loss of tonnage appeared due to the wrongful act. Dr Cuchra replied that a degree of judgment was involved as to how much was so attributable. A customer should not be excluded where only part of the drop in sales was attributable to the wrongful act; that was necessary on a portfolio approach, because one of the great advantages of such an approach was that the various exogenous factors tended to cancel one another out. Dr Cuchra then explained how that would operate in the case of Schneidersoehne and Papier Union, where sales lost from Schneidersoehne were taken up by increased sales to Papier Union. If the customers were considered individually, that movement of sales would be lost. It was specifically put to Dr Cuchra that in the case of Schneidersoehne he had attributed all loss to the wrongful act, that he replied that that was a misrepresentation of his position. The loss of sales to Schneidersoehne caused by exogenous factors was counterbalanced by the increase in sales to Papier Union as a result of exogenous factors. If Schneidersoehne alone had been left out the effects of the defenders' conduct would be understated, but if both companies were left in the portfolio there is an offsetting effect. The converse would apply if only Papier Union were left in. I found Dr Cuchra's reasoning in this part of his evidence compelling, and ultimately I am persuaded that he was correct to emphasize the advantages of a portfolio approach.

[260] The defenders further submitted that a bottom up approach could not be said to be impracticable. 40 customers were involved, and the largest and most significant of these numbered only eight. I am not convinced by this criticism. The problem is that the decisions not to purchase Gemini are made only in part by the merchants, who are the primary customers for the board; the initial decision as to which board to buy is made by printers or end users. Consequently it cannot be said that a bottom up approach only requires the investigation of 40, or eight, merchants; most of the critical decisions are not made by those merchants but by the merchants' customers, and discovering what they did and why is a much more time-consuming exercise. In any event, it is far from clear that many of the merchants or their customers would wish to take part in the investigation; to do so would require considerable time and effort in recalling what had happened some years previously, and might be thought to involve the imparting of commercially sensitive information. Finally, the defenders submitted that Dr Cuchra's approach was flawed in that it was binary, there was no room for a finding that only part of a drop in tonnage was attributable to the defenders' conduct. This point was not developed, but I am not convinced by it. It seems to me that Dr Cuchra's approach permitted account be taken of the loss of tonnage owing to the defenders' breach of contract and owing to other factors.

[261] The defenders made specific criticism of the way in which Dr Cuchra dealt with the acquisition of Schneidersoehne by Stora Enso and the granting of an exclusive agency to Papier Union. In my opinion that criticism was based on a misunderstanding of the way in which the portfolio approach is used in this case. It is answered in the passage in Dr Cuchra's cross-examination referred to in paragraph [246] above (6 May, 10.46 onwards). Further criticism was directed at Dr Cuchra's claims that a portfolio approach has intrinsically better statistical properties, and that it can accommodate linkage between customers. Again, I do not think that these criticisms are well founded. Dr Cuchra discusses the question of linkages at some length in his report, in particular in sections 3 and 5, and it appears to me that he was able to point to a substantial number of specific examples. Mr Overd in his second report (table 2) also performed the exercise of providing a scatter plot to present data on the basis of complaints per 1,000 tonnes of product supplied, making allowance for different sizes of customers. This indicated a lack of correlation between the number of complaints and the drop on sales; Mr Overd stated that this was done in an intuitive way. From this, it could be said that the division of customers into high complainers and low complainers was arbitrary and distorted by the inclusion of those who did not complain at all. In my opinion this exercise is of limited value. It only took one part of the overall analysis, and ignored the remainder.

[262] Finally, the defenders challenged the robustness of Dr Cuchra's findings in his second report. Mr Overd had carried out a number of robustness tests by making adjustments to the figures used by Dr Cuchra and calculating whether the results seemed reasonably consistent with the results achieved by Dr Cuchra. The defenders submitted that the results obtained by Mr Overd demonstrated the unreliability of all damages estimates made by Dr Cuchra. I have considered the question of robustness above at paragraph [162]. For the reasons set out in that paragraph and developed thereafter I am of opinion that Dr Cuchra's figures are quite sufficiently reliable for the purposes of a damages estimate. It is perhaps worth emphasizing that a large part of the defenders' criticism of Dr Cuchra's approach related to the question of whether Schneidersoehne should be included or not. I have discussed this matter at length, and have concluded that the results would be quite unrealistic if Schneidersoehne were excluded. Indeed, if it is perhaps obvious that excluding the largest Gemini customer will reduce the damage by a substantial margin. I consider that including it but using a portfolio approach, as Dr Cuchra did, will produce a better estimate. In their submissions the defenders also pointed out that the results of Dr Cuchra's calculations, as set out in his second report, included figures that varied to a considerable degree. Understandably, perhaps, the defenders stressed the figures at the bottom end of the range, but of course other figures were found at the top end. When these figures are looked at as a whole, I am satisfied that the results that he has adopted are broadly in the middle of the range

Conclusion on lost tonnage

[263] Dr Cuchra concluded Part 5 of his second report by summarizing his estimates of lost tonnage. He averaged the three methods that he had used as follows (Table 5.7):

	Acquired portfolio	Modified portfolio (22)	Modified portfolio (30)
Direct analysis	22,589	10,991	14,690
Difference-in-differences analysis	48,348	8,635	15,382
Analysis of market shares	12,999	4,565	7,888
Average	27,979	8,064	12,643

On this basis, Dr Cuchra considered that the correct approach, identified in economic literature, was to take an average across the estimates. Dr Overd suggested that averaging across models would not improve robustness because individual models were biased (first report, paragraphs 96- 97). Dr Cuchra considered that the models that use were appropriate and unbiased; he had in addition introduced a number of changes to reflect Mr Overd's comments. On that basis he considered that taking an average across models with improved accuracy of estimates. In the absence of idiosyncratic shocks that affected the portfolio asymmetrically, lost tonnage should be estimated on the basis of the whole portfolio. Nevertheless, the factual evidence in the present case suggested that idiosyncratic shocks might be present, and for that reason Dr Cuchra considered it appropriate to concentrate on the lost tonnage based on the two modified portfolios. These were the final figures of 8,064 tonnes (22 customers) and 12,643 tonnes (30 customers). This compared with an estimate of lost tonnage in his first report of 11,874 tonnes. Dr Cuchra was inclined to favour a figure towards the upper end of the range.

Conclusions on calculation of lost tonnage

[264] Overall, I am of opinion that Dr Cuchra reached a reasonable estimate of the lost tonnage. I prefer the portfolio approach that he followed, for the reasons stated above, and I prefer his approach to acquisition effects. In general I am persuaded by his evidence that he took due account of the factual information and reached a reasonable result. Clearly there were elements of uncertainty in his approach; he was quite open in accepting that he had had to exercise judgment on a significant number of occasions. Nevertheless, I consider that Dr Cuchra's calculations in the second report are, on a balance of probabilities, sufficient to conclude that sales were lost as a result of the defenders' breaches of contract and to provide a reasonable estimate of such lost sales.

Margins
[265] In order to calculate the pursuers' loss, the lost tonnage must be multiplied by the margin obtained by the pursuers on sales during the period of their loss. Dr Cuchra carried out this calculation in both of his reports. For present purposes I will concentrate on the analysis of margins contained in Part 6 of his second report. Nevertheless, I should record that in his first report he carried out such a calculation based on information provided by the pursuers. This was criticized by Mr Overd in his own first report (paragraphs 161-163), and his criticisms were considered by Dr Cuchra in his second report.

[266] First, Mr Overd suggested that the pursuers' labour costs should have been taken into account in performing the calculation. In a case where labour resources could be increased or reduced with relative ease according to current demand, that criticism would undoubtedly be correct. It was clear on the evidence of the pursuers' witnesses, however, that the pursuers did not operate on that basis. Instead, they employed a fixed pool of labour on fixed contracts, and deployed them over an elaborate series of shifts. The size of the labour force employed in production did not vary according to volumes produced. On that basis I consider it clear that labour costs should be treated as part of fixed costs rather than variable costs; they are accordingly not relevant to the estimates of margins. The relevant evidence came from Mr Wallace. He explained (12 November, 11.53) that the pursuers' production line employees operated on a pattern of five day shifts of 12 hours each, then four night shifts of 12 hours each and then had four days off. This was repeated seven times, after which the members of the shift had 18 days off. Thus it was impossible for the pursuers to run extra hours. Consequently, if the pursuers' sales were running at 80 to 85% of capacity they could not do anything other than use the five-shift system. If they stopped production they would run the risk of losing more sales than they would save in labour costs. If sales dropped below 80%, it would be necessary to change the shift pattern, dropping to a two or three shift system. Furthermore, the shift pattern explained the benefits to the pursuers of taking up surplus capacity. Filling the capacity of the machine could be achieved for the cost of raw materials, power and distribution costs. There were no additional labour costs because the machine worked 24 hours a day seven days a week. That would be reflected in the margin on additional business. The thinking behind the acquisition of Gemini was that the pursuers would acquire 11,500 tonnes of additional sales, which should make a significant contribution, and to substitute 12,000 tonnes of the pursuers' least profitable business, which would make a margin. (The word "contribution" was used in the technical sense of a contribution to total revenue, after deducting variable costs; the calculation was sales price less the total of carriage, credit insurance, raw materials, electricity and steam costs. Labour was left out of account because it was a fixed cost. "Margin" was used to mean the contribution less the overhead rate; this was calculated in such a way as to give a margin per tonne). This explained why the acquisition of Gemini was so beneficial to the pursuers; they were able to fill the capacity on their machine for the cost of raw material, power and distribution costs. In my opinion the explanation given by Mr Wallace, which was not challenged, makes it clear that labour costs should not have been taken into account in calculating margin; they were fixed costs, not variable costs, at least in the time scale that is relevant in the present case. Mr Overd suggested that, according to economic theory, all costs are variable in the long term. I can understand why that is so as a matter of theory, but it seems to me that, in the circumstances following the acquisition of the Gemini brand, the likelihood was that the pursuers would be operating at more than 80% of capacity and consequently that, in the three or four years after acquisition at least, labour costs would be fixed. For this reason I consider that Dr Cuchra's report is clearly correct.

[267] Secondly, Mr Overd suggested that Dr Cuchra's estimates of margins were questionable because the margin figure used was substantially higher than the pursuers' internal margin. The internal margin referred to in Mr Overd's report (paragraph 162), described as the "average contribution margin", was £230 per tonne. The pursuers had indicated, however, that that particular margin was a gross margin: sales price less selling costs less transfer value. The transfer value included production overheads. Those overheads are fixed costs, and consequently the resulting margin should not be used to calculate the value of lost tonnage. Once again, that seems to me to be an answer to Mr Overd's point.

[268] Mr Wallace's evidence on margins also indicated (12 November, 12.12) that in their internal calculations the pursuers had underestimated the margins that they would achieve through the Gemini acquisition. In particular, the prices obtained from Schneidersoehne and customers in Benelux were significantly higher than had been expected. (The pursuers' expectations are set out at production B424). In relation to the economics of the transaction, Mr Wallace explained (13 November, 2.20) that, while the pursuers expected to make a margin of £230 per tonne over the full 23,500 tonnes taken over from the defenders, 11,500 tonnes of that would provide a contribution, not a margin (in the sense discussed above at paragraph [266]). Those 11,500 tonnes would accordingly contribute between £400 and £450 per tonne. The remaining 12,000 tonnes would involve replacing a negative margin with a positive margin, and would accordingly provide a margin improvement of £140-150 per tonne. Mr Overd had failed to recognize that, for the pursuers to manufacture additional volume, they only required to incur the costs of material and delivery.

[269] In evidence, Dr Cuchra discussed the issue of contribution and margin (5 May, 12.34). He pointed out that he used the words "contribution" and "margin" in a somewhat different sense from the pursuers. Nevertheless, he agreed with the same general approach. The fundamental task, once lost tonnage had been estimated, was to multiply that by the amount in pounds lost per tonne. The question was which costs change between the factual and the counterfactual. Thus fixed costs, which do not change with the change in volume between the factual and the counterfactual, make no difference and are accordingly irrelevant.

[270] After Mr Overd's report had been produced, the pursuers provided both experts with their management accounts. These accounts provided data on average margins from the second quarter of 2005 the first quarter of 2007. The management accounts did not contain precise information on the margins applicable to the portfolio of customers used in the damages estimation; consequently a direct comparison of the information in the management accounts with the margins used by Dr Cuchra in his first report was not possible. It was nevertheless possible to use what Dr Cuchra described as a "high-level" comparison of the two sets of margins as a check on robustness. The particular problems were that the management accounts did not contain data on margins for individual customers and were not sufficiently detailed to account exactly for direct variable costs; the latter included power but not water, but those two were aggregated in the management accounts. In addition, direct machine costs included some fixed labour costs, which did not need to be subtracted when calculating the margin. Nevertheless, some degree of comparison was possible (Dr Cuchra's second report, paragraphs 6.15 onwards; evidence on 5 May, 1.52 onwards). On such an approach, Dr Cuchra's conclusion was that the margins estimated using management accounts were "broadly consistent" with the margins calculated on the basis of detailed customer-level information obtained from the pursuers. The estimate based on customer-level data was, on average, lower by £24.70 per tonne; this was 7% lower (£378 as against £403) than the estimate calculated on the basis of the management accounts. Furthermore, Dr Cuchra compared the margins calculated on the basis of data provided by the pursuers on all customers in the eight national markets with the margins applicable to the customers in the modified portfolio acquired from the defenders. The latter margin was, on average, £60 per tonne higher than the corresponding margin for all customers in the eight markets. Dr Cuchra thought that that confirmed the reasonableness of the margin figure used by him.

[271] Dr Cuchra nevertheless updated his estimates of margins in his second report (paragraphs 6.21 onwards). For the modified portfolio of 22 customers he arrived at a margin of £433 per tonne; for the modified portfolio of 30 customers the margin was £440 per tonne. The figures were close together, and Dr Cuchra, in his calculation of loss, adopted the lower figure. He was satisfied that this figure was arrived at on a conservative basis and was checked against other available information. I accept that view, and I accordingly consider it a reasonable figure to use.

Defenders' submissions in relation to margins

[272] In their submissions the defenders criticized Dr Cuchra's analysis of margins. They pointed out that identifying the correct margin is just as important as identification of lost tonnage. That is clearly correct. The defenders then referred to an apparent discrepancy in the figures used for contribution; Dr Cuchra had used a figure of £428 per tonne, but in the calculation carried out by Mr Wallace prior to the acquisition (production B425) the total anticipated contribution per tonne was £230 per tonne. This discrepancy is referred to in Dr Cuchra's second report (paragraphs 6.8-6.10), where he points out that the figure used by Mr Wallace was a gross margin (sales price less selling costs less transfer value, the latter including production overheads). Thus Mr Wallace's figure included overheads which were fixed costs, and it should not have been used to calculate the value of lost tonnage. This matter was put to Mr Overd in his cross-examination (12 May, 10.49). The figure of £233.60 that he had drawn attention to was contrasted with another figure in Mr Wallace's calculations, £362.56, which is described as the margin for "increased volume". It was suggested to Mr Overd that the latter figure was the margin for tonnage that would have utilized the spare capacity available to the pursuers, and he stated that he had not known that. It seems to me that on this point Dr Cuchra was clearly correct, and I accept his evidence on it.

[273] The defenders further submitted that the selling price of Gemini produced by the pursuers was a critical part of the calculation of margin, because in the case of Gemini sales that replaced existing Trucard sales the difference in margin depended on the selling price. They went on to suggest that the pursuers had failed to prove what the selling price was, and therefore had failed to prove an essential element in the case. This criticism appears to me to be incorrect. The pursuers led detailed figures for the margins that they used, including margins derived from the pursuers' management accounts. Those figures must inevitably have taken account of sales prices. If the defenders had wished to challenge these, of course, they could have cross-examined Dr Cuchra or Mr Wallace, or led evidence of their own. In my view they cannot now criticize the pursuers' figures, which were led without any challenge as to the accuracy of the selling price component.

[274] Finally, the defenders submitted that Dr Cuchra's calculations failed to take account of the fact that for each additional tonne sold additional consideration would be payable under the Asset Purchase Agreement, the initial figure being £160 per tonne. In my opinion this point is not relevant to his calculation. The exercise that Dr Cuchra was performing is the valuation of an asset, the intangible property acquired by the pursuers from the defenders. The additional consideration, however, is part of the price of that asset, and it is difficult to see how the price can have any effect on the value. It may be that further additional consideration is payable; that is the subject matter of the action that the defenders have raised against the pursuers. If decree is pronounced in that action, the result will be a separate debt which can then be set off against sums due by the defenders to the pursuers as a result of this action. That is quite distinct from the valuation of the intangible assets. I should, in addition, point out that it was not put to either Dr Cuchra or Mr Overd that the liability to pay additional consideration would have any impact on the valuation, whether on a portfolio or bottom up analysis.

Defenders' further criticisms of Dr Cuchra's reports

[275] In their submissions the defenders made a number of criticisms of Dr Cuchra's approach to estimation of the loss suffered by the pursuers. First, they submitted that Dr Cuchra attributed the whole of the drop in tonnage measured against the counterfactual that was suffered in the last quarter of 2005 and first quarter of 2006 to the defenders' conduct. That does not appear to me to be correct, for two reasons. First, a substantial number of customers were excluded because the loss of their business was regarded as attributable to idiosyncratic shocks. Secondly, Dr Cuchra considered that one of the important reasons for adopting a portfolio analysis was that it helped to remove other idiosyncratic factors affecting customers' business through a balancing exercise.

[276] The defenders went on to submit that Dr Cuchra accepted that an acquisition or merger may have a negative effect on sales (second report, page 24, footnote 53). Mr Overd's evidence was that the literature suggested that the effects tended to be negative (7 May, 12.28). He was unable to say in this case whether the effect was negative, but the matter was one that required empirical verification. That would suggest that the pursuers would have to go through individual Gemini customers to discover what extent any fall in business was attributable to acquisition effects rather than the defenders' breaches of contract. I doubt whether that would be practicable. In any event, the use of a portfolio analysis, and the modification of that portfolio by excluding customers affected by idiosyncratic shocks, were used specifically to deal with matters such as acquisition effects.

[277] The defenders then submitted that Dr Cuchra's technique of comparing counterfactual and factual scenarios relied on the existence on a benchmark that could provide a good proxy for how volumes sold to affected customers would have been expected to evolve in the absence of the defenders' wrongful conduct. That condition, it was submitted, was not satisfied in the present case. Any acquisition-driven change unrelated to the defenders' conduct would have affected the group of acquired customers but not the market as a whole or a control group of the pursuers' customers. I think that is correct up to a point, but it ignores the fact that excluding customers from the portfolio and using a portfolio analysis together tended to eliminate or balance out shocks related to the acquisition. In any event, the defenders did not provide any positive evidence of acquisition shocks. By contrast, the pursuers provided a considerable body of evidence relating to loss of business brought about by the defenders' conduct.

[278] The defenders attacked Dr Cuchra's reliability and independence as an expert witness on the basis that the stated in his examination in chief that he had "worked on many mergers", whereas in cross-examination he accepted that he had limited experience in this field and that assessing the likely success of mergers and acquisitions was outside his area of expertise. I have checked my notes and I am unable to find any such statement. Indeed, my distinct impression was that Dr Cuchra accepted that he had limited experience of mergers. He described his main work (4 May, 11.20) as the valuation of company performance, for private companies and others. Most of the work was commercial but some was regulatory in nature. This involved the valuation of intangible assets, and he had performed that task on several projects. In general, however, I do not find the defenders' criticism to be well founded. In fact I found Dr Cuchra to be generally careful and straightforward in his approach, and I have taken account of his evidence on that basis.

[279] Finally, the defenders in their submissions drew attention to the variation in Dr Cuchra's evidence of loss under each of his methods of calculation. The variation is clear. Nevertheless, given the significant number of variables that are used in each of the different methods of calculation, and the way in which they differ from one method to another, this does not appear to me to be surprising. The type of economic analysis carried out by Dr Cuchra does not, as I understand matters, claim to give precise results that do not vary significantly according to the method of calculation. That sort of precision does not appear possible. What Dr Cuchra attempt to is rather to make use of economic data that are inevitably imprecise and to produce an approximation of the level of loss that the pursuers have suffered. In doing so he used a number of different methods and averaged the results that they produced, in order to minimize the biases that any one method, used by itself, might produce. That appears to me to be an entirely reasonable way to proceed. Consequently I think that the variations referred to by the defenders are not of great significance, and certainly do not undermine the basic strength of Dr Cuchra's analysis.

Conclusion on loss

[280] Dr Cuchra's final calculation of loss (contained in Part 7 of his second report), was arrived at by multiplying the lost tonnage by the margin. His view was that the figures that resulted from use of the modified portfolios of 22 and 30 customers were conservative, in view of the fact that using the entire portfolio acquired from the defenders would result in a significantly higher estimate of loss. On this basis, the undiscounted damage based on a portfolio of 22 customers was £3,493,053 (8,064 tonnes multiplied by £433). The undecided damage based on a portfolio of 30 customers was £5,476,850 (12,643 tonnes multiplied by £433).

[281] Those amounts required to be discounted, in a manner that was not put in controversy by the defenders; the methodology is set out in section 3 of Dr Cuchra's first report (paragraphs 3.32 onwards; see second report, paragraphs 7.10 and 7.11). The resulting figure for loss calculated as at April 2007 (the month when the summons was served) was £3,078,787 for the portfolio of 22 customers and £4,800,689 for the portfolio of 30 customers. As mentioned above, Dr Cuchra's final view was that the higher end of this range was appropriate; the logic of the portfolio approach was such that the fewer customers that are excluded the less is the likelihood that the balance will be distorted.

[282] For the reasons described above I accept that Dr Cuchra's methodology produces a reasonable estimate of the pursuers' loss flowing from the defenders' breach of contract. I accordingly accept his view that the loss is likely to fall within the range described in the preceding paragraph, and is probably towards the top end of the range. Inevitably, the figures produced by such a methodology are approximate, and I consider it appropriate to adopt a round figure. Taking a broad view, I am of opinion that an award of damages of £4,250,000 would be appropriate.

Pursuers' conclusions for payment

[283] In addition to their claim for damages, the pursuers have also made a number of claims for payment of various sums that they alleged to be due to them by the defenders in respect of the transaction comprised in the Acquisition Agreement and the Services Agreement. I will deal with these in turn.

First conclusion: payment of customer claims under indemnity in clause 14.6 of the Services Agreement

[284] Clause 14.6 of the Services Agreement is quoted above at paragraph [46]. In summary, it contains two obligations: first, the pursuers agree to settle any Customer Claims having an aggregate value of not more than £200,000; and secondly, the defenders are to indemnify the pursuers against all losses and expenses incurred by the pursuers arising from Customer Claims to the extent that the aggregate value of such Customer Claims may exceed £200,000. In addition, the pursuers were entitled to retain £200,000 from the Stock Payment, to apply such sum in settling any Customer Claims. Customer Claims are defined in clause 1.1 of the Services Agreement as "all claims, demands for proceedings by any customer relating to any stock, the Licenced (sic) Products or any other Products manufactured or supplied by Inveresk after the Effective Date but prior to the Completion Date". The period referred to in that definition is the period from the date of the agreement to the termination of the Services Period. The Stock Payment is also defined in clause 1.1; it is an amount equal to the net book value of the defenders' stock in trade acquired by the pursuers at the end of the Services Period, up to certain maximum sums. The intention was that, at the end of the Services Period, the pursuers should take over that stock, and should pay the defenders the amount of its net book value. In their defences, the defenders admit that the pursuers paid customers the sum of £229,483.87 in respect of the board claims, and admit that they are liable to make payment of that sum. It is also admitted that the pursuers paid customers a total amount of £264,760.20 in respect of consequential losses claim by customers.

[285] The defenders have raised three legal arguments against liability under clause 14.6. The first is that the indemnity granted by them under clause 14.6 extends only to the value of claims in excess of £200,000. The significance of the figure of £200,000 was explored in the evidence of Mr Parr (27 October, 1.59). He stated that that sum was arrived at because it represented 5/12 of claims made against the defenders in the preceding year; that proportion was appropriate because the Services Agreement was to last for five months. Mr Parr's understanding was that the defenders were to meet the cost of customer claims in full; no suggestion had been made that the defenders were only liable for any claims made in excess of £200,000, and the first that he had heard of such a suggestion was in the pleadings. That evidence was not the subject of cross-examination. I accept Mr Parr's evidence as to the basis on which the retention of £200,000 was calculated; it seems to me that that was part of the background circumstances of the contract. Otherwise, however, I consider that the construction of force 14.6 is a matter of law for the court, and should not be affected by his views.

[286] Nevertheless, on the wording of the clause, and taking into account its obvious commercial purpose, I am of opinion that the indemnity granted under clause 14.6 extends to the whole of the Customer Claims settled by the pursuers, and not merely to those in excess of £200,000. The critical point is that the two parts of the clause must be read together. The first sentence provides that the pursuers will settle Customer Claims up to £200,000 and will reimburse themselves with a retention from the payment that they are required to make for stock taken over from the defenders. That means that the settlement of such Customer Claims is ultimately made out of the defenders' funds. The second sentence provides for an indemnity from the defenders for claims in excess of £200,000, but that clearly assumes that the first £200,000 of claims has been settled from the retention. It is thus obvious that the purpose of the clause, taken as a whole, was to ensure that all Customer Claims arising out of production by the defenders prior to the end of the Services Period were paid out of the defenders' funds. There is perhaps an obvious equity in that, as the defective products were manufactured by the defenders, and the defenders would have received the price of such products.

[287] In fact the stock that the pursuers were to take over at the end of the Services Period proved to be faulty, with the result that there was no Stock Payment Retention from which the pursuers could pay Customer Claims. The relevant evidence was given by Mr MacLeod (27 November, 12.10 onwards), who dealt with the problems with the stock in some detail. In those circumstances, the retention provided for in the first sentence of clause 14.6 could not operate, and thus the pursuers did not have the benefit of funds otherwise due to the defenders to pay for the first £200,000 of Customer Claims. In the circumstances I consider that the clear meaning of the agreement is that the defenders should meet the whole of the Customer Claims, without any deduction for the first £200,000. I accordingly construe the clause in that way. Even if that were wrong, the fact that the retention mechanism could not operate was the result of the defenders' breach of contract, in failing to produce stock that complied with the relevant quality standards. Had it not been for that breach of contract the pursuers would have been able to operate the retention mechanism. In those circumstances the pursuers failure to make use of the retention of £200,000 would have formed part of a damages claim. In the event, however, I construe the clause as imposing liability for the full amount of Customer Claims on the defenders.

[288] The defenders' second legal argument against liability under clause 14.6 is that they are not liable for customers' consequential losses, those being losses beyond the cost of the defective board supplied to a customer. In my opinion this argument is without merit, for two reasons. First, the wording of clause 14.6 and the definition of Customer Claims suggest that all losses are to be covered, not merely board costs. Secondly, the evidence established very clearly that the practice in the industry was to pay reasonable consequential losses, and that the defenders had consistently followed that practice. In view of the almost universal nature of the practice, I am of opinion that it is a background fact that would be known to reasonable persons in the position of the parties. It follows that the underlying factual assumption on\ which clause 14.6 was based was that consequential loss would be included as well as board costs.

[289] Clause 14.6 contains no restriction to board costs; indeed it refers to "any" Customer Claims in its first sentence and "all" Losses and Expenses arising from Customer Claims in its second sentence. The definition of Customer Claims in clause 1.1 makes the point even more clearly; it is defined as meaning "all claims, demands or proceedings by any customer relating to any stock... manufactured or supplied by Inveresk". The foregoing wording, taken by itself, is in my opinion quite sufficient to include consequential losses. The expression "Losses and Expenses" is, however, the subject of a further definition, found in clause 1.1 of the Asset Purchase Agreement, that provision being incorporated by clause 1.1 of the Services Agreement. The latter definition refers to "actions, proceedings, losses, damages, liabilities, claims, demands, costs and expenses,... but, for the avoidance of doubt, excluding any loss of profit, revenue, goodwill or other indirect or consequential loss". The latter definition is not found in the first part of clause 14.6, and thus the pursuers are entitled to use the retention of £200,000 to settle Customer Claims without restriction, including consequential losses as well as board costs. So far as the indemnity in the second part of clause 14.6 is concerned, the Losses and Expenses that are referred to there are losses and expenses incurred by the pursuers. Thus the consequential losses that are excluded by the definition in the Asset Purchase Agreement are consequential losses of the pursuers, not those of the defenders' customers. The customers' own consequential losses, however, fall within the definition of Customer Claims, and that is not affected by the separate definition of Losses and Expenses.

[290] The evidence established that in the paper and board industry it is the normal market practice for manufacturers to compensate customers for consequential losses that arise directly from defective paper. Documentary evidence taken from the defenders' customer claims database demonstrated that the defenders consistently paid the consequential loss element in claims by customers; the relevant document is the extract from that database (production L3290, spoken to by Mr Sinclair on 30 October at 12.25). In addition, the defenders' customer response forms and correspondence indicated that information was regularly obtained on consequential losses, and indeed was specifically asked for by the defenders' employees (documents at O4153, 4163 and 4174, spoken to by Mr Parr on 28 October at 11.46). The existence of those forms appear to me to be very powerful evidence indeed that the defenders did in fact pay consequential loss. Mr Sinclair also referred to the practice followed by the defenders in dealing with claims made by customers for defective products supplied during the Services Period; when the validity of the claim was considered by the defenders they approved the consequential loss element, but when the pursuers submitted an invoice, having paid the claim, the defenders refused to pay the consequential loss element (4 November, 3.52) .The general practice followed in the industry was spoken to by Mr Wallace (12 November, 2.31); he stated that the industry practice was to pay consequential losses, and that if the pursuers did not, they would not have customers. Mr Dougan (18 November, 11.00) stated, in very emphatic terms, that consequential costs would fall to be paid; that was the practice of the paper industry.

[291] The representatives of Gemini customers also gave evidence about industry practice. Mr Tschoner (3 November, 11.44) stated that in the paper industry it is absolutely normal that, besides board costs, consequential loss will be discussed and paid. Often it is a question of finding a compromise. If consequential losses were refused, customers would no longer buy. At this point I noted that he was very definite in his evidence. Mr Tschoner also stated (3 November, 11.53) that he could not recall any occasion when the defenders had rejected a claim for consequential losses. Mr Slootweg (3 November, 4.35, under reference to production L3297) stated that consequential losses would be included. It was the usual practice of the defenders, and also the industry practice, to settle not only the board but costs also consequential costs that could be substantiated. Mr Hasecker (4 November, 10.13, under reference to production L3296) stated that it was normal for a manufacturer to settle consequential loss claims. If a manufacturer made it clear that it would not pay consequential loss claims, Papier Union would stop sourcing board from the supplier. Mr Rigg (4 November, 12.33) stated that it was usual throughout the industry for the supplier to meet claims for both board and consequential loss. This was based on the relationship with the supplier. Mr Rigg's company, BemroseBooth, relied on their own contract conditions, which specified that consequential loss would be recoverable. Mr Swain (4 November, 2.17) stated that consequential costs would usually be paid by the defenders; that was standard practice in the industry. He was asked what would happen if the manufacturer said that it would not pay, and replied that the manufacturer would have very unhappy customers. McNaughton would hold money back if consequential losses were not paid. If a manufacturer stated that consequential loss would never be paid, that would have serious consequences, as everyone else pays, and other brands are available.

[292] The former employees of the defenders also spoke to the practice of paying consequential loss. Mr MacLeod (6 November, 11.34, under reference to production D1083) stated that the payment of consequential loss was part of the normal negotiating process when complaints were assessed. He subsequently stated (12.42) that the practice at Carrongrove was to be both board and consequential costs. Mr Law (6 November, 3.17) referred to the point when the defenders started to challenge consequential loss claims, and said, in relation to practice until 2005, that such claims were paid against complaint material. Mr Couper and the sales team would try to reduce exposure, but complaints would be settled and credit given. The defenders' standard complaints form (production D1048) contained an entry for consequential and commercial loss, as well as board costs. Mr Law confirmed that the policy of the defenders had been to settle such claims if they were justified.

[293] The suggestion that consequential losses were not covered by the parties' agreement appears to have originated with Mr Walker when he realized the possible costs of the defective board manufactured by the defenders during the Services Period: see production D1082-1083. Mr Walker founded on the terms of business used by the defenders, but those terms were not incorporated into the Services Agreement and were not in fact proved in evidence. For that reason I consider them to be irrelevant. Moreover in the contractual arrangements between the parties it was stated that the defenders had no standard terms and conditions. In clause 8.3 of the Asset Purchase Agreement, it was stated that the defenders had not entered into any agreement with the customer on terms materially different from its present standard terms and conditions of business, a copy of which was attached to the Disclosure Letter. The Disclosure Letter stated, in paragraph 8.3 of Schedule 1, that the defenders did not employ a set of standard terms and conditions. On that basis, any attempt to rely on standard terms and conditions would be contrary to the terms of the parties' bargain.

[294] The third argument advanced by the defenders against liability under clause 14.6 was that in July 2006 the pursuers had cashed a cheque tendered by the defenders in respect of invoice SH108529; that cheque did not cover the consequential loss element claimed under the invoice, and consequently the defenders were not liable for any consequential loss claimed under that invoice. The pursuers issued the invoice SH108529 (production H2453) on 4 May 2006. On 12 July the defenders sent a cheque for £81,844.05 in respect of the invoice. The covering letter (production H2452) stated that the payment was made "in full and final settlement of all claims howsoever arising in respect of the items detailed in the schedule attached to your invoice". The cheque was accepted and banked by the pursuers. On a subsequent occasion, on 18 October 2008, the defenders sent another cheque for a sum that did not include consequential loss, with a covering letter stating that it was in full and final settlement. The pursuers did not accept this and returned the cheque. The contrast, it was argued, pointed to the fact that acceptance of the earlier cheque indicated an intention to compromise the amount claimed in the invoice.

[295] The pursuers' response to this argument is that, on an objective basis, there had never been consensus between the parties to compromise this element of the pursuers' claim for customers' consequential losses. In advancing this argument the pursuers relied on the evidence of Mr Sinclair. That evidence related in part to the objective situation that existed in relation to consequential loss prior to the sending of the invoice on 4 May and in part to Mr Sinclair's own intentions at the time. In my opinion his evidence is relevant to prove the objective situation that existed between the parties, which clearly forms the factual background to the tendering and acceptance of the cheque. The personal intentions of any individual, however, are not in my opinion relevant, except to the extent that they may have been manifested to the other party. For that reason I rely on Mr Sinclair's evidence only as demonstrating the objective position between the parties when the invoice was sent and the cheque was tendered.

[296] Nevertheless, on the basis of the objective situation that existed prior to the sending of the invoice, I am of opinion that the pursuers' argument is correct. The question of consequential losses had been raised by the defenders as early as January. By April, at least, the positions of both parties had been made clear: the pursuers were claiming consequential losses suffered by customers, and the defenders were refusing to pay for them. The position appeared clearly from correspondence between Mr Sinclair and Mr Thomson; this was spoken to by Mr Sinclair in his written statement at paragraphs 308-316, and in evidence on for November 2009 at 3.38 onwards. On 3 April Mr Sinclair provided Mr Thomson with a spreadsheet (production F1723) setting out customer complaints that had been received as a result of production during the Services Period. The spreadsheet was returned by Mr Thomson on 11 April with comments in a right-hand column (production F1803-1806) in this document Mr Thomson made it clear that the defenders were continuing to deny responsibility for any consequential loss elements. On 13 April 2006 Mr Sinclair replied to Mr Thomson in a further e-mail (production F1841). This provided as follows:

"1. Of the £52k+ credited by Tullis Russell since the acquisition and supported by signed approvals by a director of Inveresk plc, £22k+ was for consequential loss.

2. Of the £37k+ of credits which Inveresk plc have issued since the acquisition..., £15k+ has been for consequential loss. 70% of these credit notes in number include consequential loss.

3. From the records we have of your complaint data, we can see that in 2005 prior to the acquisition, out of a total complaint settlement figure of £528k+ some £222k+ has been paid out for consequential loss.

4. Your own internal complaints/claim form contains sections for consequential loss.

Our paramount concern is for the value of the brand and customer list we have taken over. As we have outlined before, to suggest to customers that their consequential loss claims would simply not be recognized would be such a radical departure from Inveresk's custom and practice in dealing with the same customers before, and indeed since the acquisition, as would very seriously damage the value of the investment and our ongoing relationship with these customers. This simply can't happen.

Therefore, I must repeat our complete rejection of your assertion that Inveresk will not reimburse Tullis Russell for any consequential loss associated with the settlement of Customer Claims. If you must insist upon this position the matter will ultimately be decided by the court...".

In my opinion the last paragraph of that e-mail made the pursuers' position very clear; no reasonable person in the position of the defenders could be under any impression that the pursuers were making any concession on the question of consequential losses. The pursuers' position was reiterated in a further e-mail from Mr Sinclair to Mr Thomson dated 26 May (production G2375).

[297] Against that background, when the pursuers received Mr Thomson's letter of 12 July 2006 (production H2453), they were in my opinion entitled to assume that their position was clear, and the defenders must have understood that position perfectly well. That letter reiterated the defenders' position on consequential loss, but then went on to say that the payment was made in full and final settlement of all claims. Such a statement is commonly encountered, but it is somewhat formulaic and its significance may easily escape an unwary recipient. Indeed, the critical sentence does not even refer to consequential losses, the matter that was in dispute between the parties. For these reasons I am of opinion that the mere banking of a cheque sent with a covering letter containing the formula does not inevitably lead to the conclusion that a claim for any greater amount is automatically waived. Instead, the critical question is whether a reasonable person observing the transaction would conclude that the recipient of the cheque had agreed, objectively speaking, to waive any greater claims. In the present case I am clearly of the opinion that no such conclusion could be drawn. The parties had been arguing at length about liability for consequential losses, and it would be quite extraordinary if the pursuers, or indeed the defenders, were to yield their position by mere implication. In addition, I note that the notion that the pursuers had conceded their position on consequential loss was not made by Mr Thomson in correspondence following the banking of the cheque (evidence of Mr Sinclair, 5 November, 12.47 onwards). This is clearly not conclusive, but it tends to support the view that I have reached.

[298] I am accordingly of opinion that the pursuers have made out their claim for the entire sum claimed in the first conclusion, namely £494,254.07.

Third conclusion: consequential loss element of customer claims

[299] This conclusion, for £264,760 20, relates to the consequential loss element of customer claims. Counsel for the pursuers made it clear that this claim was an alternative to the claim in the first conclusion. As I have decided to grant decree for the amount sought in the first conclusion, this conclusion is superseded. Nevertheless, I should indicate briefly the nature of the claim and my reaction to it. The claim is for the amount of customers' consequential losses paid by the pursuers. The basis for the claim is damages for the defenders' breach of clauses 2.1(c), 2.1(e) and 5 of the Services Agreement. For the reasons stated above, I am satisfied that the defenders were in breach of that contract, and that the consequential losses paid by the pursuers to customers were the direct consequence of the defenders' breach of contract. I would accordingly have granted decree in terms of the third conclusion had I not done so in respect of the first conclusion.

Fourth conclusion: additional costs incurred in assessing, negotiating and processing customer claims
[300] The fourth conclusion is for £30,600.81. It is a claim for additional costs that the pursuers allege they have incurred in assessing customer claims properly, negotiating those claims and in due course of processing and paying them. Those costs fall into three categories. First, the pursuers had planned to employ Mr Couper, the defenders' former quality control manager, for three months following the expiry of the Services Period to deal with post-completion issues. In fact, because of the level of complaints, they required to employ him for a period of seven months, and his salary for the additional period amounted to £12,485.01. Secondly, the pursuers had to allocate Mr Dougan for half his working time for an additional four months to assist Mr Couper in dealing with customer claims. This part of the claim is 50% of Mr Dougan's salary for that period, which amounted to £7,402.33. Thirdly, Mr Couper, Mr Dougan and Mr Sinclair had to incur travel expenses for visiting customers who had complaints. Those travel costs are said to amount to £10,713.47.

[301] The quantum of the claim is agreed, apart from one matter (first joint minute, paragraphs 14-19); the details are set out at productions K3206-3218. Those costs were spoken to by a number of the pursuers' witnesses. Mr Sinclair stated that it was necessary to extend Mr Couper's contract until 10 May 2006 (written statement, paragraph 302; 5 November, 3.21). In addition, Mr Sinclair spoke to the pursuers' incurring travel costs for Mr Couper and others, including himself. The one issue in the claim that is not agreed relates to a flight by Mr Sinclair to Innsbruck to visit Dinkhauser; the question was raised as to whether it was also used for purposes not involving Dinkhauser. Mr Sinclair gave evidence that the reason for the flight was to deal with Dinkhauser (5 November, 3.25), and I accept that evidence.

[302] Mr Wallace also gave evidence on this matter (17 November, 10.53). He stated that Mr Couper had been taken on for three months in an attempt to ensure a smooth transition. Complaints usually come through within two to three months, and consequently it was thought that three months would be sufficient for him to deal with all complaints arising out of the Services Period. In fact the number and volume of complaints were so great that it was necessary to extend Mr Cooper's contract, ultimately to June 2006. Salary for the additional period of employment, beyond the initial three months, forms part of the claim. Half of Mr Dougan's salary during a period of four months also forms part of the claim. Mr Wallace explained this in his evidence (17 November, 11.01). He stated that the volume of complaints was such that more than one person was required to deal with them. While Mr Dougan was employed already by the pursuers, and his salary would have been paid in any event, apart from the volume of complaints he would have been working with existing customers and on such things as trials, running the pursuers' product at customers' premises in order to obtain new business. The pursuers' claim also relates to certain of Mr Sinclair's expenses. On this matter, Mr Wallace stated that some of the complaints and the way they were handled by the defenders created issues at a high level at some of the merchants. The pursuers never had to send someone at a very senior level to try to deal with those complaints.

[303] The defenders did not lead any evidence to contradict the pursuers' averments that the costs claimed in the fourth conclusion were unnecessary or unreasonable, or that they did not flow naturally and directly from their breaches of contract. In view of the foregoing evidence, I am satisfied that this element of the pursuers' claim is made out, and I will grant decree for the sum claimed in the fourth conclusion.

Fifth conclusion: payment of customer rebate to Koelle Eiketten

[304] The fifth conclusion of the summons is for payment of £7,033 70. This relates to the pursuers payment of a customer rebate to a Gemini customer, Koelle Etiketten. The pursuers claim that they were entitled make such a payment and to be indemnified by the defenders for it in terms of clauses 3.5 and 3.6 of the Services Agreement. Clause 3.5 provides that all rebates up to and including the Completion Date (the end of the Services Period) should be borne and paid by the defenders and as from the completion date should be borne and paid by the pursuers. Clause 3.6 states that, to the extent that the defenders had not paid any rebate due to be paid by them under clause 3.5 within 14 days of the due date for payment, the pursuers were entitled to make such payment on the defenders' behalf, and the defenders should indemnify the pursuers for the full amount so paid together with any consequential costs and expenses.

[305] Evidence in this matter was taken from Mr Wallace (17 November, 11.06). He stated that Koelle Etiketten had a rebate agreement with the defenders, but the defenders did not honour it. The pursuers had to ask Koelle Etiketten for details of the rebate. Once those were available, the pursuers raised the credit for that rebate. The rebate related to sales made by the defenders, and was paid to try to retain business from Koelle Etiketten. He was asked whether, if the defenders thought that the rebate was not due, it was merely a voluntary payment. Mr Wallace replied that that was not so; this was an example of payments that the defenders had sought to avoid. Koelle Etiketten took the view that the payment was due to them.

[306] No contradictory evidence was led. I am satisfied on the basis of Mr Wallace's evidence that the rebate was properly paid to Koelle Etiketten, and that the sum sued for in the fifth conclusion is accordingly due to the pursuers.

Sixth conclusion: claims in respect of credit note (Schneidersoehne) and discount (McNaughton)
[307] The sixth conclusion is for payment of the sum of £25,485.32. This is made up of a credit note for £22,485.32 issued to Schneidersoehne and a discount of £3,000 granted to the James McNaughton Group in respect of Gemini products. The pursuers claim that those amounts were incurred by them as a consequence of the defenders' breach of contract and, in any event, as mitigation of the overall damages for loss of profit.

[308] The problem with Schneidersoehne related to the quality of the Gemini stock held by them following the end of the Services Period. Schneidersoehne were concerned about the quality of such stock, and wanted a rebate to reflect the fact that much of the stock was, they thought, likely to prove unusable because of its quality. As a result Schneidersoehne withheld substantial sums due for payment to the pursuers. Discussions took place between the pursuers and Schneidersoehne, and ultimately it was agreed that a rebate of 50% would be allowed on the value of the stock held by them. The relevant evidence is contained in Mr Sinclair's written statement, at paragraphs 339, 342 and 344, Mr Parr's written statement at paragraph 66, and Mr Wallace's written statement at paragraphs 48 and 78. That evidence was not challenged, and I am satisfied that this part of the pursuers' claim is well founded.

[309] James McNaughton Group raised a major complaint about Gemini board supplied during the Services Period which was sold to a company called Eaglemoss. The dispute was eventually compromised, and one of the terms was that a discount would be granted on future purchases of Gemini by McNaughton. Most of the compromise was implemented, but Mr Dougan, the responsible employee of the pursuers, did not sign off on a final sum of £3,000 (written statement page 79; evidence on 18 November, 3.28) and McNaughton made a big issue of that payment. They were an important customer, and they had paid £3,000 to their own customer. It was therefore decided that the matter should be settled as a result of a commercial decision. Mr Dougan expressed the view that this was one of the times when a commercial settlement has to be made. Mr Wallace dealt with the same issue (17 November, 11.16). He gave evidence that McNaughton had paid Eaglemoss, their customer. In addition, they had lost the business of another customer, Tipografic, as a result of Gemini complaints. Against that background, the £3,000 was credited as a commercial settlement; McNaughton were being reimbursed for what they had paid to try to retain some sort of business relationship. The foregoing evidence was not challenged. I am satisfied by it that the discount of £3,000 was properly granted. In these circumstances I will pronounce decree for the sums sought in the sixth conclusion of the summons.

Counterclaim

[310] The defenders have a counterclaim in which they conclude for damages for breach of the pursuers' obligations in Parts 2 and 3 of the Schedule to the Asset Purchase Agreement. Ultimately, the only part of the counterclaim insisted in related to a failure on the part of the pursuers to give KPMG, the defenders' accountants, access to inspect books and records. The sum claimed in respect of that item was £4,640.80. This claim is based on clause 6 of Part 1 and Part 3 of the Schedule to the Asset Purchase Agreement. Those provisions relate to additional consideration that may be payable by the pursuers to the defenders in the event that the tonnage of board sold by the pursuers during the year from 8 November 2005 to 8 November 2006 exceeds certain limits. Until the tonnage has been agreed or determined, clause 6 obliges the pursuer to procure that the defenders' accountants are given access at all reasonable times to all books and records in their possession.

[311] The defenders' contention is that on two occasions, on 25 October and 13 November 2006, the pursuers had refused KPMG access when they sought to visit their premises. In consequence, it is said, KPMG employees made two fruitless journeys to Markinch, and the sum claimed is the costs incurred in consequence. The quantum of this claim is agreed in the joint minute. To substantiate the claim, the defenders rely entirely on evidence of the pursuers' witnesses, in particular that contained in their written statements. No attempt was made to cross-examine them on this matter. The pursuers do not deny that the journeys were made by KPMG employees. Nevertheless, Mr Parr considered the attitude of the defenders to be entirely unreasonable (written statement, paragraph 133). At this stage, he said, the relationship between the parties had broken down and it appeared that the audit was being used as a way of causing the pursuers inconvenience. His recollection was that the defenders' representatives turned up at Markinch when they had been told that they would not be granted access. Ultimately a mutually convenient date was agreed for an audit. The defenders submitted that this ignored the evidence from Mr Sinclair (written statement, paragraphs 435-436) that the pursuers were having problems in providing statements of the tonnage sold by them. The defenders further relied on the evidence of Mr Wallace, who stated (written statement, paragraph 90) that when on 17 October 2006 Mr Thomson e-mailed the pursuers to say that he had arranged for a team of three KPMG representatives to attend at Markinch the pursuers had not finalized the figures themselves; consequently they did not think that there was any benefit in the KPMG team coming at that stage. In relation to the second visit, Mr Wallace stated (written statement, paragraph 94) that he had been told by the defenders on 11 November 2006 that KPMG would attend on 13 November. On this occasion Mr Wallace stated that the pursuers could not permit the defenders access without proper notice or specification of the information requested and the purpose of the request. All of this took place against a background of extensive correspondence between the parties' solicitors.

[312] The case for the defenders is that the right conferred by clause 6 was unqualified, and that the attitude taken by the pursuers, in particular in relation to the request made on 11 November 2006, was not justified by the terms of the clause. I do think that it is correct to say that the right conferred by clause 6 is wholly unqualified; the obligation in the clause is to give accountants "access at all reasonable times". I was not addressed on what amounted to a reasonable time; in particular, it seems to me that the expression could either mean times when business would normally be conducted, or alternatively times when the particular information that the accountants were looking for would be available. If the second construction is adopted, it might be quite reasonable for the pursuers to deny access at a stage when they were still collating information that would be required by KPMG. On the whole I tend to favour the latter construction. Nevertheless, apart from that consideration, it seems to me that the attempts to send KPMG employees to Markinch took place at a time when there was considerable friction between the parties, involving their solicitors. Very little notice was given of the second attempt, and the evidence did not disclose the detailed circumstances of the first attempt. If, for example, the defenders had been told in advance that access would be denied, it can be said that the defenders failed to mitigate their loss arising from the breach of contract by sending representatives when they knew that the exercise was fruitless. On the evidence that was available, I am simply unable to form any view on such considerations.

[313] Counsel for the pursuers invited me to dismiss this part of the defenders' counterclaim. In my opinion that is the appropriate course to take. The attempts to visit Markinch arose out of the defenders' claim for additional consideration, which forms part of a separate action that has yet to go to proof. Dismissal will have the advantage that the defenders can pursue the claim as part of that action, leading such evidence as may be necessary.

Retention

[314] The final matter in dispute between the parties is a plea of retention taken by the defenders. As indicated above at paragraph [3], the defenders have raised an action against the pursuers for additional consideration that is said to be due under the Asset Purchase Agreement. Under that agreement, in addition to the initial consideration of £5 million that is payable by the pursuers to the defenders, a further sum may become payable by the pursuers as Additional Consideration. The amount of this depends on the volume of certain products sold by the pursuers during the period from 8 November 2005 to 8 November 2006. In the action brought by the present defenders, they claim payment of the sum of £909,395 as Additional Consideration. To that claim the present pursuers, the defenders in that action, have tabled a plea of retention, in terms of which they claim to be entitled to withhold payment of any sum that might be due by way of additional consideration until the result of the present action was known. Thus the plea of retention taken by the pursuers involves the contention that the pursuers were entitled to withhold performance of any obligation to pay that might arise under the Asset Purchase Agreement until it was determined whether the present defenders were due to pay them any sum under or for breach of the Services Agreement. The present defenders contended in the action for additional consideration that, because two separate contracts were involved, the obligations relied on by each side were not counterparts of each other, with the result that retention was not available.

[315] The action brought by the defenders has been the subject of two debates, a reclaiming motion and ultimately an appeal to the Supreme Court: [2010] UKSC 19. The decision of the Supreme Court was that the plea of retention was available. Lord Hope of Craighead, who delivered the leading judgment, indicated that the plea of retention was based on the principle of mutuality of contract. He continued (at paragraph 37):

"In the present case there are ample grounds for regarding the two agreements as depending upon one another and as each forming part of the same transaction. Clause 16 of the Asset Purchase Agreement is an entire agreement clause. It states that that Agreement (together with the documents referred to in it or executed at Completion) constitutes the entire agreement and understanding between the parties with respect to its subject matter. The Services Agreement is referred to in clauses 1.1 and 7.1 of the Asset Purchase Agreement, and the parties are agreed that both agreements were executed at the same time. Recital (C) of the Services Agreement... makes it clear that that agreement was being entered into in order to facilitate the integration of the manufacture and distribution of the Products into existing Tullis Russell operations and to enable Tullis Russell to obtain the full benefit and value of the assets being acquired under the Asset Purchase Agreement. Clause 22, the entire agreement clause, states that the Services Agreement and the Asset Purchase Agreement of even date contain the whole agreement between the parties in respect of the subject matter of that Agreement".

At paragraphs 44 and 45, Lord Hope referred once again to the interaction between the two agreements. He stated:

"The obligations undertaken by Inveresk were all designed to serve the same end, which was to preserve the value of the intellectual property rights and other assets acquired by Tullis Russell after the Completion Date. As for the payments to be made by Tullis Russell, the Services Fees payable under clause 3.1 of the Services Agreement were a counterpart of Inveresk's obligation to perform services referred to in clause. But in my opinion their obligation to pay the sum of the Initial Consideration and the Additional Consideration to Inveresk was a counterpart of the performance by Inveresk of their obligations under both agreements".

[316] The opinion of Lord Rodger is to similar effect: paragraphs 76 and 77. Lord Rodger went on to consider the relationship between retention and the statutory principle of compensation, and concluded (at paragraphs 106 and 107) that the right of retention in cases such as the present, where two contracts are involved, is equitable in nature, and thus depends upon the discretion of the court. In relation to the present case, he held (at paragraphs 108-112) that, had it been necessary to consider the practical effect of retention, the circumstances were sufficiently special to justify a departure from the general rule that payment of a liquid debt should not be postponed because the defender has an illiquid claim against the pursuer. The critical fact was that the contracts were "unquestionably closely interlinked and form part of the same overall transaction".

[317] For the pursuers it was submitted that retention was not an absolute right; it was equitable in nature, and the court had a discretion as to whether or not to give effect to the plea. The claim in the defenders' action, it was said, now proceeded on the basis that a tonnage audit was required, but such an audit had been offered by the pursuers three years ago. Had that been accepted, the action could have been disposed of at that time. Thus matters had been unnecessarily delayed through the present defenders' own fault. In the circumstances it was not equitable that any part of the sum due by the defenders to the pursuers should be withheld any longer.

[318] While I can see some force in the pursuers' argument, it seems to me that this is a case where the two contracts are very closely integrated, for the reasons set out in the passages cited above from the judgments in the Supreme Court. That by itself is in my opinion a strong indicator that a plea of retention should be upheld. The sums due by the defenders to the pursuers under the Services Agreement for breach of that agreement can be regarded as true counterparts to any Additional Consideration payable under the Asset Purchase Agreement. In those circumstances, it seems equitable that the plea of retention should be given effect. While it is true that the present defenders have maintained their action for a period of three years on the basis that was ultimately held in the Supreme Court to be incorrect, I do not think that that is sufficient to overcome this basic consideration. I will accordingly sustain the defenders' plea of retention to the extent of the sum sued for in their action, £909,395. If the defenders are successful in their action, interest will run on that sum, but I think that the plea of retention should be limited to the principal sum; this can be regarded as recognizing the defenders' responsibility for the delay that has occurred in their action.

Disposal of action

[319] For the reasons stated above, I will grant decree in terms of the first, fourth, fifth and sixth conclusions, and I will award damages in terms of the pursuers' seventh conclusion in the sum of £4,250,000. I will dismiss the counterclaim, and will sustain the defenders' plea of retention to the extent of the sum of £909,395.