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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Acre 1127 Ltd (In Liquidation) v De Montfort Fine Art Ltd [2011] EWCA Civ 87 (09 February 2011) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2011/87.html Cite as: [2011] EWCA Civ 87

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BIRMINGHAM MERCANTILE COURT
Her Honour Judge Alton sitting as a Judge of the High Court
7BM40063

		Royal Courts of Justice Strand, London, WC2A 2LL
		09/02/2011

Lord Justice Tomlinson :

Introduction

1. This is an appeal from a decision of Her Honour Judge Alton sitting as a Judge of the High Court, given after a ten day trial in the Birmingham Mercantile Court. The trial concerned a claim by the Claimant/Respondent, De Montfort Fine Art Limited, to whom I shall refer hereafter as "De Montfort", for damages for breach of a rolling supply agreement (hereinafter "the Supply Agreement") requiring minimum quarterly purchases of contemporary commercial artwork. De Montfort was the seller thereunder and the Appellant/Defendant, Castle Galleries Limited, hereinafter "Castle", was the buyer. De Montfort alleged that it had terminated the Supply Agreement on account of its repudiatory breach by Castle. Castle, who denied the efficacy of the Supply Agreement until weeks before the trial, denied that it had been in breach thereof and counterclaimed on the basis that, by service of its counterclaim, it had accepted the repudiatory conduct of De Montfort as terminating the Supply Agreement. De Montfort claimed its loss of profits in respect of three unperformed quarterly obligations and damages for repudiation, effectively the profits lost over a further twelve month period which represented the contractual notice to terminate which Castle could permissibly have given. Castle claimed loss of profits over a comparable period together with consequential losses. The judge found in favour of De Montfort and awarded it judgment in the sum of £1,320,364.81. The counterclaim was dismissed.
2. Castle appeal against that decision on various grounds. It contends that it should be under no liability to De Montfort and/or that its counterclaim should succeed. Because of the belated appearance of a quantified counterclaim, which had thitherto in the judge's words been "muted and unquantified", and had been an alternative to the primary denial of the efficacy of the Supply Agreement, it was agreed before the trial that the quantum of the counterclaim would be stood over for later determination if necessary. The amount counterclaimed is in excess of £4 million.
3. The judge had to resolve a number of fiercely contested interlocking issues of fact. It was a trial in which there were so many permutations in respect of the ultimate findings of fact that it must have been difficult for the advocates to focus their submissions. The judge's task was made more difficult by the fact that all of the principal actors in the dispute gave evidence which was not just dishonest but indicative of a willingness to say whatever was required by the exigencies of the moment. I will at the outset pay tribute to the judge's exceptionally careful judgment. Her approach to the fact finding exercise was, in my view, impeccable. Whilst some of her findings of fact are challenged, it is ultimately on the legal characterisation of the consequences of those findings that the appeal turns.

Background

4. I gratefully adopt paragraphs 3-19 of the judge's judgment in which she sets out the background in a manner which is not challenged, save insofar as the judge indicates therein areas of dispute in respect of which she later made findings where relevant and necessary.

"3. De Montfort, the shares in which, at the material time, were wholly owned by Helen Swaby, a director and important witness in this case, has developed into a substantial company in the business of the sourcing, printing and sale of what has been described as commercial contemporary art. At the time in question it did not have an in house retail operation, selling generally to small retail galleries. It was considering the possibility of developing its own retail operation. Castle was an independent company incorporated by Ian and Darren Weatherby-Blythe in 2001 to sell affordable commercial fine art to the mass market. By December 2004 it had already 13 galleries in operation with two more due to open in April and May 2005. The art which it sold was broadly of the same category as that being published and wholesaled by De Montfort. It did not however purchase or stock any art work from De Montfort. It had already developed a close relationship with Washington Green from whom it sourced all the artwork which it sold. There was however no written agreement governing that relationship which had evolved without, apparently, the parties ever having had to resort to debate as to precisely what their legal relationship entailed, there having been substantial give and take on both sides. That relationship has however developed a certain importance in this particular case as it is part of the case of Castle that it was entitled, with De Montfort, to the same rights and privileges that it had previously enjoyed with Washington Green. Washington Green had been taken over some years previously by Halcyon the ultimate owner of which is a trust of which Ehud Sheleg, a director of all the relevant Halcyon companies to include Castle after its acquisition, is either the or a beneficiary.

4. The art with which I am concerned is of a commercial nature and can be split into three categories for the purpose at least of this case. Firstly there is original work produced by artists either to specific commission or ordered by reference to a style or series. Some artists may be very prolific and produce tens or hundreds of canvases in a particular style or in particular colour ways so that commissions can be placed for particular paintings with a fair degree of confidence as to the picture which will be provided: for example Jonathan Shaw's "Sailing" in, say, navy white and silver or brown copper and white which would result in the production of a predictable canvas or series of canvases. Other artists are less productive and maybe less predictable. Their work may be ordered by reference to a particular genre; for example Barsby's film noir style, launched in early 2005, where one might commission repeat canvases in a particular style which may well not be quite so repetitious as, say, a Shaw or a McGregor – another of the De Montfort artists producing substantial quantities of a particular style.

5. Another part of the De Montfort range was that of limited edition giclee prints either based upon original paintings or which may be the product of those who concentrate upon producing limited edition prints. The print run may be 200 or say 1000. These are associated with Artists proofs the quantities of which may vary depending upon the size of the print run but may number 10 or more. Some companies also produce what are called printers proofs; this is not however done by De Montfort which over the years has increasingly been printing limited editions for its artists having, by January 2005, five printing presses. It did not however print all limited editions which it published; some would be printed by others either abroad or within the United Kingdom.

6. Lastly there are sculptures which are also marketed in limited editions. These again can be split into two. Firstly there are bronzes which may be cast in a relatively small edition of 100 to 150. The same or a similar sculpture may also be produced in what has, in this case, been referred to as porcelain although I understand it to be a form of resin. The castings are all carried out abroad and shipped in to order.

7. As I have said Castle had become a very successful and expanding business. In 2003 it won an award within the Fine Arts business community which brought it to the attention of Waterford Corporate Finance Limited who approached it with a view to seeing whether it could assist financially by introducing Castle to potential sources of finance. By 2003 Darren wanted to realise his share in the value of the business whereas his brother Ian wanted to raise funds in order to invest and expand further so an injection of capital was needed. They were ultimately introduced to venture capitalists Dunedin who, on an initial review of the business, expressed some concern as to the dependence of Castle upon Washington Green from whom they sourced all their art and relied for credit.

8. On 29 October 2004 there was a meeting between Castle, represented by Ian, and Dunedin. Mr Sheleg insisted upon attending, he having been made generally aware of the discussions between the Weatherby-Blythes and Dunedin who also wished, given his Group's importance to Castle, to meet him. I find that at this stage Mr Sheleg made it plain that he could not guarantee support for Castle's expansion plans; nor could he guarantee that Castle would always enjoy the same favourable trading terms as it then currently did. As a consequence Dunedin withdrew its offer to acquire Castle.

9. Thereafter there appeared to have been somewhat desultory discussions between Mr Sheleg and Castle as to the possible acquisition of Castle by Halcyon. Throughout the late autumn to January 2005 there was however no figure proposed by Halcyon or agreed.

10. Unbeknownst to Mr Sheleg Castle, as a consequence of the previous advice of Dunedin and as a consequence of the somewhat veiled threats which I find Mr Sheleg did make on the 29 October 2004 as to the consequences upon supplies and credit if Castle proceeded with a deal with which Washington Green/Halcyon was not comfortable, commenced discussions with De Montfort as to a possible merger of the two businesses capitalised by injection of investment funds. In addition the brothers were sufficiently concerned by Mr Sheleg's attitude and persuaded by Dunedin's advice to want to seek to secure an alternative supply in the event that Washington Green were to create difficulties were it to find out about the ongoing merger discussion with its competitor. In any event they wanted to start easing the business off its exclusive dependence on Washington Green by establishing an additional source of artwork.

11. On 6^th January and again 11^th January 2005 there were meetings between Helen Swaby Mark Ansell and the Weatherby-Blythes not only to discuss a possible merger but also the broad terms of a supply agreement to be entered into between the parties. Darren, who attended the 11^th January meeting without Ian who was on holiday, had prepared an agenda titled Project Hart . . . Both meetings went well and, by the conclusion of that of 11^th January, there were only two items on the agenda left to be resolved on the proposed supply agreement those relating to the percentages of product returns which would be permissible and the length of the agreement. In the course of the earlier visit Darren and Ian toured the premises and viewed some of the art displayed. I find, although Darren and Ian have appeared to minimise their familiarity with De Montfort's range, that they would have been broadly aware of the nature of its limited-edition ranges and familiar with some of their artists given that both operated in the same commercial fine art market, would attend the same trade shows and no doubt, as part of their business development, would have some awareness of the competition.

12. A further meeting was arranged for 19^th January 2005 attended by Darren and Andrew White of Castle, Helen Swaby and representatives of her sales team. There is dispute as to the purpose of this meeting and as to its result. De Montfort contends that there was a detailed ordering process during the course of which Darren, having viewed a large range of original and limited-edition art, placed a substantial order with De Montfort effectively as the first tranche under the shortly to be executed supply agreement. Castle's case is that, as Miss Swaby well knew, the purpose of the evening was simply to identify the artists and ranges of limited edition work in which Castle would potentially be interested and which it would like to be withheld from the Spring Fair, Darren having in any event no authority to enter into any form of binding commitment without the sanction of his brother. It maintains that the brothers had already explained to Miss Swaby the without commitment reservation system which they enjoyed with Washington Green and which it had been agreed would also be operated between Castle and De Montfort at the earlier meetings.

13. In the course of the 19^th January meeting manuscript notes had been kept on De Montfort's order pad of matters discussed by Ms Hill and Ms Godson. It was agreed that Miss Swaby would have the notes typed out and provide a copy of the list of artworks ordered or reserved (dependent upon who was evidence is to be believed) to the Weatherby-Blythes. Miss Swaby says that this was done and that an order, confirming the verbal order lodged by Darren on 19^th, was prepared based on the manuscript notes and typed up between 20^th and 25^th January it having been posted by her to Castle on or about 26^th January. Castle denies having ever received such a document nor is any copy of that which Miss Swaby says she sent out available to the court in either hard copy or electronic form. A substantial issue has arisen as to the circumstances in which the document, . . . originally produced and described as a copy of the order, came to be generated it being evident now that that document only came into existence in August 2005. Miss Swaby said that it was identical to and mirrored the January document all copies of which, in either electronic or hard copy form, have been lost. Castle on the other hand submitted that the purported copy was in effect a forgery constituting plain evidence that De Montfort's claim is dishonest and that there never was an order placed.

14. De Montfort alleges that shortly after the 19^th January meeting Ian Weatherby-Blythe telephoned, during the course of which he placed an order for a number of limited-edition sculptures and, later, an order for catalogues in order to assist Castle in the marketing of the De Montfort art. Both orders are denied.

15. On the 25^th January 2005 Ian Weatherby-Blythe signed the Supply Agreement, . . . at a meeting with Miss Swaby and Mr Ansell.

16. During this period merger/acquisition discussions continued not only between Castle and De Montfort but also Castle and Washington Green, neither De Montfort nor Washington Green however being aware of that fact. On 20^th January Ian Weatherby-Blythe had met Mr Sheleg. Ian was, by then, reasonably confident that he had the bones of a supply agreement and a second source of art. An offer was made by Mr Sheleg for the acquisition of Castle. That offer was rejected at a subsequent meeting on or about 7^th February as being too low at which time Ian Weatherby-Blythe e-mailed Mr Sheleg . . . . referring to threats which he alleged that Mr Sheleg had made once he had discovered, at that meeting, that there had been continued discussions with De Montfort. Mr Sheleg broadly accepts the accuracy of the bullet points summarised in that e-mail albeit he suggests that the points were not made as threats and were put more mildly.

17. Shortly thereafter Mr Sheleg, on behalf of Halcyon, made a further and better offer which led to the signing of Heads of Terms between those parties on or about 15^th February 2005.

18. Despite having agreed Heads of Terms Castle kept its options open, protecting itself against the risk of those Heads of Agreement failing, by continuing its merger discussions with De Montfort who were unaware of the Halcyon deal until it was finally concluded in April 2005. Miss Swaby says that during this period she had a number of telephone conversations with Ian during which she asked when Castle were going to start taking deliveries of their order and was assured that this would take place shortly; Ian maintains that the only discussions taking place related to the due diligence process then proceeding between De Montfort and Dunedin. Ian finally disclosed the Washington Green deal to De Montfort in April at which time, Miss Swaby says she immediately asked what the position would be on the Supply Agreement and the order, to which Ian made an encouraging response suggesting that there would be no problem. There is an issue as to what he told Mr Sheleg at this time, to which I will refer when dealing with the credibility of Ian and Darren Weatherby-Blythe in the context of the proceedings commenced by Halcyon against the Weatherby-Blythes alleging breaches of the warranties contained in the share sale agreement ("the Warranty Proceedings").

19. On 7^th May 2005 there was a meeting between De Montfort, Castle and Washington Green. The nature of the discussions, which concerned the Supply Agreement and the disputed order, are in dispute and I will deal with them later. Time passed – Miss Swaby suggests that she was attempting to contact Mr Sheleg with a view to further discussions and has produced copies of her text messages in support of that. Mr Sheleg denies being unavailable or obstructive contending that it was Miss Swaby who refused to cooperate or to permit him to inspect with a view to placing an order under the Supply Agreement. On 22^nd September 2005 there was a meeting between Ian and Miss Swaby at which time he was shown a significant portion of the stock which De Montfort maintains was being held back as part of the disputed order. At this time he was shown what Miss Swaby said was a copy of the written confirmation of the disputed order. At this stage Ian was still encouraging as to the prospect of Castle taking the order goods although he has told this court that he did not believe the purported copy order shown to him was genuine. Shortly after this meeting, it was made clear that Castle would not take any part of the disputed order. Accordingly by October 2005 (if not before, Castle alleges) De Montfort had started selling off what it could of the artwork the subject of the disputed order."

5. The Supply Agreement is a short document and I reproduce it in full below. Miss Swaby showed Darren Weatherby-Blythe a draft in identical or substantially identical form on her computer screen in her office after the stock selection meeting on 19 January 2005. Darren Weatherby-Blythe then approved it, whilst indicating that it would have to be finally executed by his brother, Ian, as six days later it was. The Supply Agreement provides:-

"These are the terms that have been agreed between the parties to enter into an agreement for the ongoing supply of artist's original products, limited edition prints and related products ("the Agreement")

1 The Parties are De Montfort Fine Art Limited ("the Supplier") and Castle Galleries Limited ("the Customer").

2 The Agreement will commence on 20^th January 2005 and will terminate on the expiration of 12 months written notice given by either Party.

3 The terms of this Agreement ("the Terms") shall remain confidential between the parties unless both parties agree in writing for the disclosure of the Terms to third parties.

4 The Customer has previously sole sourced its goods from another supplier. From the date of this Agreement the Customer has agreed to purchase goods from the Supplier and the Supplier has agreed to supply goods to the Customer under the Terms of this Agreement.

5 Goods supplied in respect of limited addition (sic) artwork where the Supplier is the Publisher will be at normal trade prices less 15%. Goods supplied where the Supplier is a distributor will vary depending on artist. Perez will have a 10% discount and Bulmer a 5% discount off normal trade prices.

6 Artist's original products will be at normal trade prices.

7 The Customer undertakes:

To settle all outstanding monies on the basis of 60 days net monthly

To ensure that goods purchased from the Supplier are not less than £250,0000 (sic - £250,000) per quarter, excluding VAT, from the date of this agreement

8 The Customer will be entitled to return goods throughout the period of this Agreement on the basis of a full credit for the net purchase price subject to the goods being returned within 4 months from the month of supply and not exceeding 10% of the value of that month supplies.

9 The supplier agrees to use reasonable endeavours to:

Allow the customer fist (sic) choice of original products and limited editions

Ensure adequate supplies of product

Make available 75% of artists proofs

Continue with marketing support at least equivalent to that currently enjoyed by other customers.

Collaborate with the customers to source future supplies and to keep the customer reasonably informed in artists developments and the Suppliers business as it affects this Agreement,"

When the Supply Agreement was signed on 25 January 2005 the discount allowed by the first section of Clause 5 was altered to 15%, Ian Weatherby-Blythe and Miss Swaby countersigning this alteration. In Clause 9 someone at some stage inserted the letter "r" in manuscript into the typed word "fist", the intended sense being clear.

6. The disputed order allegedly placed on 19 January 2005 lies at the heart of the controversy. The judge found that De Montfort overlooked the agreement that the manuscript notes made by Ms Hill and Ms Godson would be typed up and a copy sent to Castle. The notes were not typed up and nothing was sent to Castle. There is furthermore a somewhat arid dispute as to how the notes are to be interpreted, since they are incomplete on details such as frame size and prices. The judge also found at paragraph 59 of her judgment that the conversation concerning limited edition sculptures to which she first referred at paragraph 14, set out above, probably took place in early February, rather than in January. The sculptures account for £72,850 (before VAT) out of the total £616,564 (before VAT) which appeared on the order document later created in August 2005, which for convenience if not entirely accurately I will call the Forged Order. With the addition of VAT the Forged Order was in the total sum of £724,462.70. All this notwithstanding, the judge nonetheless concluded that both De Montfort and Castle genuinely understood and believed that a substantial order had been placed on the night of 19 January. The judge did not need to spell out quite what this understanding meant in financial terms, although it is a fair inference that she concluded that on the Castle side it was understood that there had been a commitment of the order of about £500,000, net of VAT, if not a little more. On this appeal Mr Philip Marshall QC for Castle now challenges whether Miss Swaby for her part can have had a bona fide belief that an order of that magnitude had been placed, but the judge plainly in my view concluded that she had had such a belief. Indeed the judge must have been satisfied that Miss Swaby honestly believed that the order was worth more than £500,000, leaving aside the sculptures.
7. The significance of the disputed order to the claim under the Supply Agreement is that it was common ground that when entering into the Supply Agreement both parties referred to the circumstance that an order had been placed on 19 January and acknowledged, which in context means agreed, that that order was to be treated as an initial order for the first quarter under the Supply Agreement. Thus it was that the Supply Agreement recited in Clause 2 that it was to commence on 20 January 2005.
8. It will be immediately apparent that the initial order, as on the judge's findings it was thought to be when the Supply Agreement was concluded and as on any showing it was represented by De Montfort to be as from September 2005, was in an amount at least twice that of the minimum quarterly obligation under the Supply Agreement. As ultimately represented by the Forged Order it was in context a massive order, five or six times greater in value than any single order which De Montfort had previously attracted. This is of some significance since (i) it was common ground, as found by the judge at paragraph 68(i) of her judgment, that the various obligations arising in respect of successive quarters under the Supply Agreement were inter-dependent promises and (ii) it was Miss Swaby's unchallenged evidence that contemporary artwork can be very seasonal. Paragraph 84 of her First Witness Statement reads:-

"I should explain too that contemporary artwork can be very seasonal. Unlike traditional artwork it can quickly become unfashionable and unwanted. It is much more akin to High Street fashion with its ever-changing seasonal range of clothes – where a designer's latest output renders last season's range obsolete. This is just what happens in the contemporary artwork market. Galleries want the latest releases. Unsold stock from a previous release becomes hard to shift and often of little value. Even where it is possible to shift some stock at discounted prices it can actually damage business: absorbing demand at a reduced price and thus depressing more profitable sales of current items."

9. Further, it was a term of the Supply Agreement that the supplier should use reasonable endeavours to allow the customer first choice of original products and limited editions. The judge found (at paragraph 34(vii) of her judgment) that after the meeting between Miss Swaby and Mr Sheleg on 7 May 2005 it must have become apparent to De Montfort that Castle was going to dispute the existence of a binding order for the first quarter. On 21 October 2005, after instruction of solicitors by De Montfort, Castle told De Montfort unequivocally that it would not accept the stock represented by the disputed order. The judge has vindicated Castle's position, holding that no order was in fact placed on 19 January 2005 because (a) there was no agreement as to the scope of the overall order to be placed and (b) the implicit requirement that a transcribed version of the contemporaneous notes of the meeting be provided so that Castle could review and confirm the scope of the order was not satisfied. There is no appeal against her decision in that regard. However until the status of the disputed order was resolved the parties were, as it seems to me, condemned to the gravest difficulties in attempting to perform the Supply Agreement in the second and subsequent quarters. If Castle selected for the second quarter stock which De Montfort asserted had already been ordered in and allocated to the first quarter, how was the impasse to be resolved? Put another way, if De Montfort made available for selection in the second and subsequent quarters only products which had not already been allocated by them to the first quarter, how was Castle to make its selection, consistent with its entitlement to first choice of original products and limited editions? As it happens the matter was never put to the test, since performance in the second and subsequent quarters was never, so far as I can see, overtly discussed between the parties themselves.
10. An important meeting took place at the Westbury Hotel in Mayfair on 7 May 2005. That was of course only shortly after the beginning of the second quarter. There was a major conflict of evidence over this meeting which the judge had to resolve. It was Castle's case that at this meeting Miss Swaby took the line that unless and until Castle took the disputed order, it could not have access to inspect artwork for the purpose of submitting an order or further order. The judge rejected Castle's case on this, finding that Mr Sheleg was neither refused access with a view to selecting artwork, because he did not ask for it, nor told that he must take the disputed order first, and that thereafter he avoided speaking to Miss Swaby about either the disputed order or the submission of further orders – judgment paragraph 81. There is I think no suggestion that at this meeting there was any overt reference to the placing of orders for the second and subsequent quarters. The judge found at paragraph 63 of her judgment that Miss Swaby was anxious that Mr Sheleg should attend at De Montfort's premises for the purpose of examining the stock allocated to the first order and she accepted her evidence that on more than one occasion she suggested that Mr Sheleg meet with her at De Montfort's premises. However the context of these suggestions was plainly whether Castle would accept the stock represented by the disputed order. Although Miss Swaby never, on the judge's findings, made acceptance of the first order a condition of further performance of the Supply Agreement, until the position over the first quarter was resolved the question of performance in subsequent quarters simply did not arise for discussion.
11. It was however referred to in the letter written to Castle on 7 September 2005 by De Montfort's solicitors, Messrs George Green. That letter reads, in material part:-

"We understand the factual position to be as follows:

1. The Supply Agreement commenced on 20 January 2005 and provision was made for its termination on the expiration of twelve months written notice given by either party;

2. You placed an initial order on or around 20 January 2005 to the value (net of discounts) of £616,564 plus VAT (£724,462.70 in total), but subsequently refused to take delivery (see a copy of our Client's Acknowledgement of Order at Appendix 2 to this letter);

3. You agreed to purchase goods from our client to a value of not less than £250,000 per quarter excluding VAT with effect from 20 January 2005.

To date, in addition to the order placed in the first quarter, you should also have placed orders in the quarter commencing 20 April 2005 for at least a further £250,000 of goods and are obliged to place a further order for at least £250,000 in the current quarter commencing 20 July 2005. Your obligations under the Supply Agreement are of course continuing, in the absence of either party giving twelve months' written notice of termination.

You are currently in serious breach of your contractual obligations and our client will be fully within its rights to apply to the Court for specific performance, damages and/or other relief.

In the circumstances, please advise within seven days of the date of this letter:

1. Whether or not you intend to remedy your breaches?"

Appendix 2 to the letter was the Forged Order, which Miss Swaby had created on 25 August 2005 after consulting her solicitors who, not unnaturally, asked for a written copy of the disputed order.

12. The letter of 7 September 2005 does not assert that Castle's conduct was repudiatory of its obligations. Still less does it assert that the failure to place an order in the second and/or as yet unexpired third quarter was repudiatory.
13. After a chaser on 21 September 2005 Castle replied through its solicitors, Messrs Eversheds, on 17 November 2005. Meanwhile Castle had on 21 October 2005, as I have recorded above, told De Montfort that it was not prepared to take the stock represented by the disputed order. Consistently therewith Messrs Eversheds denied that an order had been placed on or around 20 January 2005 and noted the absence of any signed contract or document evidencing such order. As to Castle's obligations under the Supply Agreement, Eversheds asserted that viewings of artwork at De Montfort's premises had so far been refused and that Castle had therefore been prevented from purchasing goods. De Montfort was also said to be in breach of its obligation under Clause 9 of the Supply Agreement to use reasonable endeavours to ensure adequate supplies of product. Proposals were made for resolution of the dispute, which if accepted would have involved entering into a new agreement.
14. Messrs George Green for De Montfort responded on 14 December 2005. The allegation that an order was never placed in January 2005 for goods to the value of £616,564 plus VAT was "vehemently" denied, as was the allegation of denial of access to view stock. The initial order was said to have been acknowledged by De Montfort when an order acknowledgement dated 20 January 2005 was sent to Castle on 26 January 2005. The judge found that this had not happened, despite Miss Swaby's evidence that she had herself written the address on the envelope, and personally taken it to the franking desk ensuring its despatch. Again, it was not asserted in the letter of 14 December 2005 that Castle was in repudiatory breach.
15. On 18 April 2006 Messrs George Green wrote again to Eversheds. Now it was said that the failure of Castle to place quarterly orders as required under the terms of the Supply Agreement and to give reasons therefor was a repudiatory breach in consequence of which De Montfort was entitled to treat itself as discharged from its obligations. In addition and in the alternative it was said that Castle's refusal to take delivery of the initial order was a refusal to perform its obligations, entitling De Montfort to regard itself as discharged from its obligations. A substantial claim was asserted. Castle was required to put forward its proposals for compensation, failing which it was said that proceedings would be issued without further notice. It was made very clear that De Montfort was exercising the entitlement which it asserted to treat the contract as at an end – it was accepting or purporting to accept Castle's repudiatory breach, which consisted in either the failure to place quarterly orders or the failure to take delivery of the initial order.
16. Eversheds responded on 3 May 2006. Castle repeated its position and reserved its right to treat the Supply Agreement as subsisting, whilst noting that De Montfort's conduct in refusing access to view artwork was itself repudiatory. Eversheds concluded:-

"We are instructed that Castle remains willing and able to place future quarterly orders, to the value of £250,000 per quarter, in accordance with the Supply Agreement going forward. Castle would also be interested in placing additional orders, without obligation, for product over and above £250,000 per quarter. Please confirm a convenient date and time when directors of Castle may attend to view the current stock with a view to placing orders pursuant to the Supply Agreement. Our client would also wish to inspect the product which your client alleges it is holding in respect of the alleged "purchase order form"."

The judge found that this latter request was "pure tactical window-dressing" – paragraph 81 of the judgment. Indeed she found at paragraph 77 that Mr Sheleg who had the ultimate decision-making power was never ready and willing to place orders under the Supply Agreement and that he never genuinely sought access to De Montfort's premises in order to enable Castle to review and select art. He was, she concluded, "neither seeking nor expecting facilities to enable Castle to order art in any of the relevant quarters before the end of April 2006".

17. Proceedings were commenced in August 2007. In October 2007 Castle denied the placing of the disputed order. The Supply Agreement was not admitted and said to be not binding in any event. Castle alleged in the alternative that if the Supply Agreement was binding then it was De Montfort who had repudiated it, which repudiation was accepted by service of the counterclaim – damages in respect of which were unquantified. It was only by amendment on 6 January 2009, a matter of weeks before trial, that Castle asserted the binding nature of the Supply Agreement together with the inclusion of a quantified counterclaim in respect of its breach.
18. Initially and by way of Part 20 proceedings Castle also joined the Weatherby-Blythes to this action, seeking indemnities on the same grounds as were set out in the concurrent Warranty Proceedings. The Part 20 proceedings were compromised before trial on the basis that the Weatherby-Blythes accepted that in the event that De Montfort succeeded in respect of its claim on the disputed order, then they would assume a capped liability therefor. For good measure Ian Weatherby-Blythe issued Employment Tribunal proceedings against Washington Green, alleging constructive dismissal. The shifting positions adopted by the Weatherby-Blythes in the Warranty Proceedings, and in the case of Ian in the Tribunal Proceedings, afforded fertile material for cross-examination at trial, as of course did the circumstance that, by virtue of the Compromise Agreement, the Weatherby-Blythes were at risk personally in respect of De Montfort's claim for damages for breach of the disputed order. The judge paid careful regard to these aspects when reaching her conclusions as to where the truth lay.

The judgment below

(i) Miss Swaby's deception

19. The judge dealt first with the question whether false documents were created in order to mislead. She concluded that Miss Swaby had sought to mislead both Castle and the Court and what is more had sought to resist the making of directions as to disclosure which would or might expose her dishonesty. After disclosed metadata had revealed that the Forged Order had been created on 25 August 2005, Miss Swaby maintained that this was simply another form of an Order which had been posted by her to Castle on 26 January 2005, which order had in turn been generated from an Excel spreadsheet form of order headed CG Order or C66, as it was described at trial, which latter document had indeed been created on 21 January 2005. She maintained this account in cross-examination on the first day of the trial. Between the first and the second days of the trial a computer expert was finally given access to the De Montfort server and to the complete metadata relating to document C66, disclosure of which had been resisted. This revealed that document C66 had also been created by Miss Swaby herself on 25 August 2005. The judge concluded, after a careful analysis of all the evidence and the probabilities, that Miss Swaby was lying too when she said that an acknowledgement of order had been sent out on 26 January 2005 because she herself had posted it. The judge found that whilst Miss Swaby may well have convinced herself that the Forged Order accurately recorded the outcome of the 19 January meeting, she knew when providing it to her solicitors without explaining that it was a recreation rather than a true copy that she was acting improperly. That initial deception had led her into further untruths, and in particular the attempt to bolster the case as to the placing of a firm order on 19 January by plugging the gap left by the failure to type out and send to Castle a copy of the manuscript notes made on the night by Ms Hill and Ms Godson. Unsurprisingly, De Montfort does not challenge any of these findings.
20. In the light of these findings the judge expressly directed herself that in relation to any other disputed issue she would need to examine Miss Swaby's evidence closely and to seek, where available, independent corroboration, paragraph 26 of the judgment, or independent verification, paragraph 70 of the judgment.
21. The judge turned next to the question whether an order for artwork had been placed on the night of 19 January 2005, with the sculptures being added thereto by agreement on 25 January 2005. After an exhaustive and painstaking analysis of the evidence, including the inferences to be drawn from the shifting of position in other proceedings, the judge concluded that no such order had been placed, notwithstanding the parties' common belief that an order of some sort had been placed. Her conclusions, summarising an analysis which occupies some seventeen pages of the judgment, can be found essentially in two paragraphs:-

"57. Where De Montfort's case starts to break down is in respect of commissions and quantities of artwork which were discussed on a broad brush basis only which discussion De Montfort interpreted – genuinely but I find mistakenly – as the leaving to them of substantial discretion as to the final formulation and make up of the order. There is also the overarching fact that there was no detailed discussion of prices and order values, no note taking by Castle and the request for a copy of the manuscript notes which it was agreed should be sent once transcribed. I am satisfied that the purpose of that was and was obviously so that Castle could check through to ascertain that the final list of artwork accorded with their requirements and that De Montfort had correctly interpreted those requirements where some leeway or approximation of figures, display combinations and the like had been left open for interpretation, and, no doubt also to check prices and total cost with a view then to confirming or correcting the order. I am also satisfied that both parties got carried away on the night with the sheer quantity of stock being pulled out to such extent that De Montfort did believe – wrongly – that certain things were being ordered which simply were not, namely the Llewellyn Bowens and the lilac colourway commissions.

. . . .

61. Although I find that both parties genuinely understood and believed that a firm commitment had been made in respect of some part of the artwork which had been selected on the night, there was no meeting of minds as to the scope of the overall order to be placed nor was the requirement, implicit in the agreement to provide a transcription of what had been discussed/agreed, for confirmation by Castle of the order once it had had the opportunity to review the overall package including quantities and prices and the accuracy of De Montfort's interpretation of what it needed once that transcription had been provided, been satisfied. The parties were at a very advanced stage in the ordering process but had not, on 19^th January or thereafter finally agreed upon the scope of the order. "

22. The judge was also not satisfied that a firm order for the limited edition sculptures was placed by Ian Wetherby-Blythe by telephone very shortly after 19 January. She had no doubt that these were discussed at some point, probably in early February rather than January 2005, with total numbers of potential sales being discussed in a context which could have led to misunderstanding. She was not however satisfied that any definite order was placed, certainly as part of the disputed order, as was De Montfort's case.
23. There is no challenge to the judge's findings in relation to the disputed order, or to her finding that both parties came away from the 19 January meeting with the genuine belief that an order had been placed. In this court Mr Marshall mounted a sustained argument to the effect that Miss Swaby cannot honestly have believed that the order was for goods of a value in excess of £222,000, this figure being derived from a close examination of the manuscript notes. In particular Mr Marshall suggested that where frame sizes and prices are not recorded on the notes, there can have been no genuine belief that an order had been placed. Close examination of the exercise conducted by Castle in order to reach the figure of £222,000 showed that it was itself deeply flawed, whilst serving nonetheless to highlight that the mechanics of the transition from the manuscript notes to the Forged Order cannot be deduced from the documents themselves. I am troubled by this part of the case, for it is totally unclear on the evidence before the court what process of reasoning takes one from the manuscript notes to a firm order for £616,564 worth of goods, which total, as I have already pointed out, includes £72,850 for the sculptures, which on any view were not discussed on 19 January. Miss Swaby said in evidence that she had always had in her mind that the figure was £616,000. She simply cannot have had this figure in mind before she had had the conversation concerning the sculptures, and in any event it is totally unclear how a firm figure in excess of £220,000 has been derived from the manuscript notes. The judge did however find, at paragraph 57 of her judgment, that De Montfort genuinely but mistakenly believed that it had been given by Castle a substantial discretion as to the final formulation and make-up of the order. Moreover a Business Plan drawn up for De Montfort in May 2005 by Clearwater Corporate Finance Ltd referred to the forecast for the year ended 30 April 2005 as including "Sales for Castle Galleries of £600,000", noting however that by 30 April 2005 it had not taken delivery of any stock. It is true, as I have already indicated above, that the judge had no need to identify and did not identify what was the magnitude of the order which Miss Swaby in good faith believed had been placed, and the evidence is sparse. But in the absence of any suggestion below that the Forged Order constituted a dishonest attempt to change or to inflate the items of art identified by Darren Weatherby-Blythe on 19 January, I do not think that it is appropriate in this court now to revisit the judge's conclusion, which I have already interpreted as amounting to a finding that after the meeting of 19 January Miss Swaby in good faith believed that an order in an amount in excess of £500,000 had been placed. I should add that Mr Marshall's belated attack on Miss Swaby's bona fides in this regard was substantially undermined by the evidence of Darren Weatherby-Blythe. Although he said in his Witness Statement that when he was first shown the Forged Order, in October 2006, he was "truly shocked and amazed by the size and amount claimed to have been ordered" it emerged in cross-examination that his shock and amazement arose from the presentation of the document as a legal commitment to buy rather than in relation to particular volumes or artists which were identified in it. Even that degree of shock must be treated with a measure of reserve in view of the judge's finding that Darren Weattherby-Blythe believed that an order had been placed.
24. The judge then turned to consider the Supply Agreement and in particular Issues 3.1, 3.2 and 3.3 as appearing in a List of Issues agreed by the parties before trial as requiring decision. Those issues were:-

"3. Whether it was the Defendant (as alleged by the Claimant) or the Claimant (as alleged by the Defendant) who breached the Supply Agreement. In particular:

3.1 whether the Defendant was ready and willing to place orders worth a minimum of £250,000 in respect of each of the quarters during the term of the Supply Agreement (as alleged by the Defendant);

3.2 whether the Claimant would not permit the Defendant to examine its available stock (as alleged by the Defendant);

3.3 whether the Claimant made it a condition of the supply of stock under the Supply Agreement that the Defendant had to take delivery of the disputed Order stock (as alleged by the Defendant); and

. . ."

(ii) The meeting on 7 May 2005

25. It was in this context that the judge had to consider what transpired at the meeting at the Westbury Hotel on 7 May 2005 to which I have already referred above. The judge made no findings as to what was actually said at this meeting beyond her findings to which I have already referred as to what was not said by Miss Swaby to Mr Sheleg. The judge found that Ian Weatherby-Blythe had already told Mr Sheleg before the meeting that De Montfort would not seek to enforce the Supply Agreement, that there would be no liability under it and that it could in effect be ignored. It is I think implicit in that finding that the judge also concluded that the Weatherby-Blythes did not tell Mr Sheleg before the 7 May meeting that an order had been placed on 19 January 2005. It was the evidence of Mr Sheleg that at the meeting he introduced the topic of the Supply Agreement which he expected might represent a problem for Miss Swaby in view of the acquisition of Castle by Halcyon, a major competitor of De Montfort. It was further his evidence that Miss Swaby then said at the meeting that she already had a large order from Castle which had been placed a few months ago. It was the evidence of Mr Sheleg, consistent with what I think was the judge's finding, that at the time he knew nothing about this order. His evidence was that he turned to Ian Wetherby-Blythe, who had accompanied him to the meeting, to ask him if he was aware of any such order, to which he replied that there had been merely a process of pre-view and reservation without commitment. As I have already pointed out the judge did find that after that meeting it must have become apparent to Miss Swaby that Castle would dispute the existence of an order. Miss Swaby's evidence was that she pressed Mr Sheleg to take the goods ordered on the earlier occasion. Her oral evidence was to the effect that "we have an order, it's been prepared, we'd like you to take it". The evidence does not suggest that there was at the meeting any discussion of the precise size of the order over and above its being large. Miss Swaby said in her Witness Statement that she had had with her at the meeting a copy of both the Supply Agreement and the Order in case they needed to be viewed in detail. Mr Marshall submits that it is therefore to be inferred that Miss Swaby must have been talking at the meeting in terms of an order for goods to the value of £616,000 plus VAT. This obviously does not follow, since Miss Swaby simply cannot have had with her a copy of the disputed Order as it had not by then been created. On the other hand it was, as I have already recorded, Miss Swaby's evidence that she had always had the figure of £616,000 in mind. I do not think that one can safely go further than to infer that at this meeting Miss Swaby made clear that De Montfort asserted that Castle had already entered into a very substantial commitment in the shape of an initial order under the Supply Agreement. I reject Mr Marshall's contention that it is to be inferred that Mr Sheleg was told at this meeting that the order was for goods of the value of £724,000 inclusive of VAT. Miss Swaby's dishonest assertion that she had had the written Order in that amount with her in case it needed to be looked at is not a sufficient ground for inferring that she must have put forward that figure, when it is not in fact Mr Sheleg's evidence that she did.
26. Mr Marshall also submitted that the judge had erred in her finding that at this meeting Miss Swaby neither refused Castle access for viewing artwork nor made performance of the first quarter obligation by acceptance of the initial order a condition of such access being afforded. The principal basis upon which Mr Marshall suggested that the judge should have found that at the 7 May 2005 meeting Mr Sheleg was refused access and told that he must take the disputed order first is that the judge should have regarded Mr Sheleg's evidence to that effect as corroborated by evidence given by Mr Young, Chairman of the Halcyon Group. Furthermore, submitted Mr Marshall, if Miss Swaby genuinely believed that a large initial order had been placed, it is inherently likely that she would have wanted that dealt with first and would have said so.
27. I am wholly unimpressed by the suggestion that Mr Young's evidence corroborated that of Mr Sheleg on the critical question whether at the 7 May 2005 meeting Miss Swaby made performance of the first order a condition of granting access and inspection with a view to placing subsequent orders. Mr Marshall's attempt to identify what was said to be the relevant passage in Mr Young's Witness Statement became increasingly desperate. Nowhere did Mr Young say in his Witness Statement that after this meeting Mr Sheleg had reported back to him that this had been Miss Swaby's stance. This gap was not sought to be plugged in examination in chief and not surprisingly Mr Young was not asked in cross-examination about an allegation which he had not made. Mr Sheleg's account of Miss Swaby's unequivocal stance at the meeting was not supported by Ian Weatherby-Blythe, who was also present at the meeting. As the judge records at paragraph 72 of her judgment, he could only say when asked about this in cross-examination that Helen (i.e. Miss Swaby) was not very enamoured, not very keen on letting the Directors of Washington Green walk around. Furthermore the judge found on the basis of overwhelming evidence, factual and circumstantial, that Castle was never refused access for the purpose of inspection. The factual evidence came from Mr Ansell as well as from Miss Swaby. In evaluating Miss Swaby's evidence on this point the judge had well in mind the care with which she had to approach her evidence in the light of the dishonesty she had earlier found. The allegation by Castle of denial of access was belated and unparticularised. It first surfaced in Eversheds' letter of 17 November 2005, to which I have referred in paragraph 13 above. Despite requests Eversheds failed in subsequent correspondence to provide details of any occasion on which access had been refused. It was not until nearly two years later that it was asserted, in the Defence and Counterclaim, that it had been at the 7 May 2005 meeting that Miss Swaby had refused to permit Castle access unless it first took delivery of the initial order. The judge dealt with this aspect of the case with enormous care, setting out her reasons for her conclusions at paragraphs 69-84 of her judgment. Mr Jonathan Nash QC, for De Montfort, rightly reminded us of statements of high authority as to the caution with which an appellate court should approach an invitation to reverse findings of fact made by the trial judge – SS Hontestroom v SS Sagaproack [1927] AC 37 at page 47 per Lord Sumner; Powell v Streatham Manor Nursing Home [1935] AC 243 at 267 per Lord Wright and Watt v Thomas [1947] AC 484 at pages 487-488 per Lord Thankerton. Those passages are too well known to require citation here. Far from the judge having "failed to use" or "palpably misused" her advantage of seeing the witnesses (per Lord Sumner in Hontestroom) the judge has, as I have already remarked, approached her fact-finding task in an exemplary manner. It follows that I regard as unassailable the judge's finding that Castle was neither refused access with a view to selecting artwork nor told at the 7 May 2005 meeting that there would be no access unless and until the first order was taken. In particular I would stress that the judge's rejection of Castle's specific allegation as to what was said at the 7 May meeting was in my view powerfully reinforced by the entirety of the evidence as to Castle's ambivalent attitude towards the Supply Agreement, which Mr Sheleg regarded as potentially "toxic", and the unsatisfactory manner in which there emerged the more general and unparticularised allegation that access had "on a number of occasions" been denied – see Eversheds' letter of 17 November 2005.

(iii) The finding of repudiatory breach by Castle

28. Thereafter matters developed as I have already described, with De Montfort's solicitors sending to Castle on 7 September 2005 a copy of the Order on which De Montfort relied. A further copy was shown to Ian Wetherby-Blythe when he attended De Montfort's premises, as the judge recounts at paragraph 19 of her judgment, which I have set out above.
29. It was against that background that the judge concluded that between April 2005 and April 2006 Castle had, without any legal justification, failed to comply with its obligations, thereby entitling De Montfort to damages – judgment paragraph 97. The judge rejected the argument of Mr Tager QC, then leading counsel for Castle, that the mere fact of assertion that there was an order placed in the first quarter was a basis for relieving Castle from the obligation to place any orders in the following second, third and fourth quarters. She concluded, at paragraph 98:-

"Whilst I can understand that the assertion of the existence of the disputed order would inhibit or prevent the placement of another order in the first quarter and form a defence had De Montfort been permitted to add an alternative claim in respect of the first quarter, I do not understand why such an assertion would relieve Castle from its obligations in respect of subsequent quarters. Whilst Mr Tager maintained that it would amount to an assertion of a contractual position inconsistent with actual contractual obligation (Day 10 pp 115 to 11p) I do not accept that De Montfort's genuine but mistaken assertion in May 2005, if not before, of the existence of the order was inconsistent with the Supply Agreement. On the contrary it was an assertion of [?"the need for"?] compliance by Castle with its contractual obligation to purchase under the Supply Contract and breach by failure to call off. I cannot in any event understand why it would amount to a breach of an interdependent promise that would in some way suspend or eliminate Castle's obligations arising after the first quarter let alone amount to a continuing breach by De Montfort so as to entitle Castle to seek damages by way of loss of profit. In the course of submissions I asked Mr Tager what the position would have been had De Montfort not simply persisted in trying to persuade Castle to take the order but had immediately issued proceedings in respect of it; would that have amounted to a breach of the Supply Agreement? At that point it appeared that this argument was being elided with the assertion that there was insistence that Castle must take the disputed order before it would be permitted to choose any further stock – a factual assertion which I have found, as a matter of fact, not to have been the case. Assuming that there remains some separate point to the effect that mere insistence upon the existence of an obligation in respect of the disputed order can constitute a repudiatory breach of the Supply agreement entitling Castle either to a defence in respect of De Montfort's claims in respect of subsequent quarters or to sue in respect of alleged loss of profits for quarters two three and four than I find that there is nothing in the point."

30. Finally, the judge recorded at paragraph 102 her conclusion that:-

". . . by failing and/or refusing to place minimum orders as provided for in the Supply Agreement without having any excuse by reason of refusal of access or the like, Castle was unarguably in repudiatory breach of the Supply Agreement. This would be so whether the obligations in respect of each quarter are or are not treated as independent or interdependent – the very persistence of Castle's failure quarter after quarter made it plain that, whatever Mr Sheleg's argument now, Castle at the time did not wish to purchase artworks under the Supply Agreement and had no intention of honouring its obligations."

31. Mr Tager had attempted to counter this conclusion by arguing that at the end of each quarter De Montfort had the option to treat the failure to purchase as a breach of condition entitling it to accept Castle's repudiatory conduct as bringing the Supply Agreement to an end or to affirm the continuance of the Supply Agreement and to treat that breach as simply a breach of warranty entitling it to damages only. Accordingly therefore, if at the end of any quarter the Supply Agreement was affirmed the right to treat the contract as repudiated and hence at an end did not thereafter arise until after expiry of the next quarter without any purchase having been made. Mr Tager's submission, on the basis of what was he said the proper construction to be given to the solicitors' correspondence to which I have already referred, was that as at 18 April 2006 there was no repudiatory conduct available for acceptance. The judge rejected this argument which has not been renewed in this court. Mr Tager appears not have challenged the basic proposition that failure and/or refusal to place minimum orders in the second, third and fourth quarters was repudiatory, even though the obligations in respect of each quarter including the first were as the judge found inter-dependent. At that stage of course Mr Tager did not know what would be the judge's findings as to the status of the disputed order for the first quarter.

The further arguments on appeal - discussion

32. Before this court Mr Marshall was able to place the alleged repudiatory conduct of Castle squarely in the context of the judge's finding (a) that no initial order had been placed and (b) that De Montfort had demanded performance of the non-existent order, the existence of which it asserted by reference to and in reliance upon the Forged Order created in August 2005.
33. Indeed it was Mr Marshall's contention that this conduct by De Montfort, combined with what he asserted should have been found to be De Montfort's refusal to permit examination of available stock and its insistence on performance of the first quarter obligation before countenancing the provision of artwork in subsequent quarters, was itself repudiatory conduct which discharged Castle from any further performance under the agreement. Furthermore, contended Mr Marshall, Castle's non-performance in the face of this repudiatory conduct should have been regarded as an acceptance thereof as in Vitol SA v Norelf Ltd [1996] AC 800. When pressed, Mr Marshall submitted that the repudiation should be regarded as having been accepted by 20 April 2005.
34. I have already concluded that one plank of this argument, that based on the discussion at the 7 May meeting, is unavailable to Mr Marshall. However that leaves for consideration two distinct questions:-

i) Should the judge have found that it was De Montfort who repudiated the contract by bolstering the demand for performance of the non-existent order by production of the Forged Order, and

ii) Even if De Montfort was not in repudiation of the contract, was the judge correct in the light of the situation concerning the first quarter order to regard Castle's failure to place orders in the second, third and fourth quarters as itself repudiatory of the Supply Agreement.

35. Most of the argument before us was devoted to the first question, but the two questions are in my view closely related. Both De Montfort and Castle left the 19 January 2005 meeting under the impression that an order had been placed for the first quarter. Castle was thereupon taken over and the new management in the shape of Mr Sheleg knew nothing about this order until 7 May, and even then was told by Ian Weatherly-Blythe that no commitment had been made. Although the Weatherly-Blythes later in the Warranty Proceedings accepted that a commitment had been made, albeit not as asserted by De Montfort, there is no evidence that before 18 April 2006 they adopted a different stance vis à vis Mr Sheleg, and in any event the finding of the judge is that contrary to the belief of both Miss Swaby and Mr Darren Weatherby-Blythe, who had been present on 19 January 2005, no binding commitment had been entered into. Of course there cannot be imputed to De Montfort knowledge of what the old Castle management had told the new management concerning the status of the first order, although as it happens what Ian Weatherby-Blythe told Mr Sheleg was correct, albeit more by luck than judgment. However, stripped to its essentials, the situation was that throughout the second, third and fourth quarters De Montfort was asserting the existence of a binding commitment for the first quarter. De Montfort thought that there was such a commitment and had the Weatherby-Blythes given an honest account to the new owners of Castle, they too would have thought that there was such a commitment. However there was no such commitment.
36. In these circumstances, taking into account the judge's finding that the various obligations arising in respect of successive quarters under the Supply Agreement were interdependent promises, the seasonal nature of contemporary artwork and the difficulties to which the parties were condemned until the status of the disputed order was resolved, it is to my mind difficult to attribute a repudiatory character to the conduct of either party in, on the one hand, asserting the existence of an (enormous) order for the first quarter and, on the other, failing to perform obligations in relation to the second, third and fourth quarters which were (a) inextricably bound up with the position concerning the first quarter and (b) never overtly discussed between the parties until solicitors came on the scene. Even then neither the letter of 7 September 2005 nor that of 14 December 2005 asserted that the failure by Castle to place orders in the second and/or third quarters was repudiatory, which as I see it reflects the reality that it would not have been so regarded by De Montfort at the time. It would not have been so regarded because, in all the circumstances which I have described, Castle's conduct in relation to the second, third and fourth quarters would not reasonably have been interpreted by a party in De Montfort's shoes as the unequivocal evincing of an intention by Castle not to be bound by the terms of the Supply Agreement.

Common mistake?

37. Consideration of the parties' difficulties in performing whilst the status of the first order remained unresolved led us to invite argument from the parties on the question, not raised by either party below, whether the Supply Agreement might in fact be vitiated by the parties' common mistake, this being their common assumption when entering into the Supply Agreement on 25 January 2005 that the first quarter's purchase obligation would be performed by delivery and payment for the goods ordered on 19 January 2005 and shortly thereafter, the sculptures. Whilst both parties duly addressed us on the point, neither party embraced with any enthusiasm the suggestion that the Supply Agreement might have been void by reason of common mistake. It was unsurprising that De Montfort did not do so. Castle however for its part preferred to pursue its counterclaim based upon its principal case that De Montfort acted in repudiatory breach of contract by virtue of its conduct in connection with the Forged Order and its refusal to permit Castle to select goods for the purposes of the first and subsequent quarters. Castle did however as an alternative submit, albeit without great enthusiasm, that the contract was indeed avoided by the common mistake, that mistake as a practical matter rendering the Supply Agreement impossible to operate in accordance with its terms.
38. The principles to be applied in determining this issue were agreed to be as set out in Great Peace Shipping Limited v Tsavliris Salvage (International) Limited 2003 QB 679. As set out therein by Lord Phillips of Worth Matravers MR at page 703, if a common mistake is to avoid a contract:-

1) there must be a common assumption as to the existence of a state of affairs;

2) there must be no warranty by either party that that state of affairs exists;

3) the non-existence of the state of affairs must not be attributable to the fault of either party;

4) the non-existence of the state of affairs must render contractual performance impossible;

5) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided, or circumstances which must subsist if performance of the contractual venture is to be possible.

39. Mr Nash for De Montfort did not accept that the non-existence of the assumed state of affairs, an effective order placed on 19 January 2005, rendered contractual performance of the Supply Agreement impossible. Pointing out that the Supply Agreement was for an indefinite term, subject to twelve months notice of termination, he submitted that insofar as any practical difficulty arose of the sort to which I have referred at paragraph 9 above, it is likely that it could have been solved by pragmatic solutions preserving the rights of the parties until resolution of the dispute between them concerning the status of the order for the first quarter. Given the size of the alleged order and the seasonal factor I am sceptical as to whether a practical modus vivendi could have been achieved. However since the matter was never put to the test and since it was not canvassed at trial I do not think that it would be appropriate to reject Mr Nash's submission. I note also that in paragraph 82 of his Witness Statement Mr Sheleg said this:-

"The fact that there was a dispute, and a significant dispute, over the first quarter of the Supply Agreement . . . should have made no difference whatsoever to whether or not De Montfort were able, and willing, to supply a minimum of £250,000 worth of product for the second quarter and subsequently. . . . the supply under each quarter was separate and was able to stand alone. . . . De Montfort could easily have isolated this dispute over the disputed order and continued to supply under the Supply Agreement."

This was said in the context of a misconceived argument to the effect that De Montfort made it a condition of further supply under the Supply Agreement that the disputed order be first performed as an excuse not to comply with its own obligations under the Supply Agreement, which it wished no longer to perform in the light of the acquisition of Castle by Halcyon. Nonetheless, it would in the light of this evidence be unjust to De Montfort and perhaps difficult to conclude that the Supply Agreement was avoided by common mistake.

Further discussion – repudiatory breach

40. This notwithstanding, in my view the implications of the dispute over the first quarter order so far as concerns future performance of the Supply Agreement are highly relevant to the question whether the conduct of Castle in relation to subsequent quarters can properly be regarded as repudiatory. As will be apparent, they have in part informed my conclusion in paragraph 36 above that Castle's conduct in that regard was not repudiatory.
41. Insofar as the argument was pursued that mere assertion by De Montfort of the existence of the disputed order was itself repudiatory of its obligations under the Supply Agreement, I reject it. It was not until after a ten day trial that it was established that there was in fact no firm order placed. Whatever Ian Weatherby-Blythe may have told Mr Sheleg on 7 May 2005 or whatever he and his brother may have told Mr Sheleg thereafter, the parties to the crucial meeting both came away from it believing that they had entered into a binding commitment, which shortly thereafter evolved into what was believed to be the first in an indefinite series of quarterly commitments. By insisting on performance of what was believed by both parties when they apparently agreed it to be a binding commitment, at a stage when neither party had been disabused of that belief by the painstaking legal analysis which in due course the trial brought to bear, De Montfort can hardly be said to have been, in context, evincing an intention not to be bound by its obligations under the Supply Agreement as a whole. From the perspective of a reasonable person in the position of Castle, De Montfort was doing no more than to assert that which both parties believed to be true. Far from evincing an intention not to be bound by its obligations under the Supply Agreement, De Montfort was, as I think the judge intended to say at paragraph 98 of her judgment, asserting the need for compliance by Castle with its contractual obligations. Like the judge, and as I have already indicated, I consider that the assertion of the existence of the disputed order has implications for the proper characterisation of Castle's subsequent conduct in response thereto but I do not consider that it can of itself, in context, properly be regarded as repudiatory conduct by De Montfort. The case is not analogous to either Woodar Investment Development Limited v Wimpey Construction UK Limited [1980] 1 WLR 271 or Vaswani v Italian Motors (Sales and Services) Limited [1966] 1 WLR 270, but it suffices to say that Mr Marshall in my view derives no assistance from indications of their Lordships in those cases as to circumstances which might there have led to the conduct under consideration falling on the other side of the line.
42. Mr Marshall also attempted to pray in aid cases which show that, where sequential performance is required, non or defective performance in relation to the first or an early obligation may create sufficient uncertainty in relation to that party's future intentions as to justify non-performance by the other party. Reliance was placed upon Bradford v Williams [1872] LR 7 Ex 259 and Sanko Steamships Co Ltd v Eacom Timber Sales Ltd [1987] 1 Ll Rep 487. Both of these were however cases where the relevant conduct was held to have been properly accepted as repudiatory or renunciatory. Just as an unaccepted repudiation is "a thing writ in water and of no value to anybody" (per Asquith LJ in Howard v Pickford Tool Co Ltd [1951] 1 KB 417, 421) so too there is no half-way house whereby non-performance which is neither repudiatory nor prevents, in the sense of rendering impossible, subsequent performance by the other party can nonetheless be relied upon as, until rectified, justifying non-performance by that other party.
43. That leaves for decision the question whether De Montfort's demand for performance of the non-existent order, not otherwise repudiatory of its other obligations under the Supply Agreement as a whole, is rendered repudiatory by the dishonest attempt to bolster it by production of the Forged Order. Ordinarily the fact that a breach of contract is accompanied by dishonesty will not of itself convert that which is not repudiatory into repudiatory conduct, just as the fact that a breach of contract is deliberate will not of itself be relevant to the evaluation whether it is repudiatory – see Treitel, The Law of Contract 12^th Ed. paragraph 18-034. It was perhaps for this reason that Mr Marshall sought additionally to characterise this as a situation in which De Montfort failed in its obligation honestly and accurately to prepare accounting documentation. I am not sure that, even if this is a correct analysis of the relationship, it adds anything to the substance of the allegation, since for the reasons already given I am unprepared to hold that production of the Forged Order constituted a dishonest attempt to change or to inflate the items of art identified by Darren Weatherby-Blythe on 19 January 2005. I would however accept that dishonesty may in this context be material, as Judge McGonigal held that it was in Northern Foods plc v Focal Foods Ltd [2003] 2 Ll Rep 728 at 747. Ordinarily however dishonesty will be material only if it is of itself destructive of a necessary relationship of trust or if it is of itself indicative of an intention no longer to be bound by the contract. The dishonesty here does not in my view fall into either category. The most serious deception was perhaps the assertion, first made in Messrs George Green's letter of 14 December 2005, that an acknowledgement of order had been sent to Castle on 26 January 2005. However Castle had of course, since 21 October 2005, maintained unequivocally that it would not accept the stock represented by the disputed order. The dishonesty concerning the sending of an acknowledgement of order had no impact. The Forged Order itself was a document which Miss Swaby convinced herself was reflective of the order which she believed had been placed. Her principal deception in that regard was her failure to explain to her solicitors that the document was a recent recreation rather than a true copy of an original bearing the earlier date. All this was folly of a high order but it must be placed in the context of the relevant parties' belief that they had entered into a binding commitment on 19 January 2005, moreover a commitment entirely consistent in magnitude with that represented by the Forged Order. In my judgment the critical feature here is the lack of any finding that Miss Swaby set out deliberately to produce a document which purported to evidence a commitment into which she knew Castle had not entered. Performance of the contract, and in particular the obligation to use reasonable endeavours cast upon De Monfort by paragraph 9 thereof, did call for an element of trust between the parties but given the contemporary belief of the relevant parties as to the status of the first order it is in my view impossible to suggest that this foolish and dishonest conduct either destroyed that necessary element or indicated an intention on the part of De Montfort not to be bound by the terms of the contract.
44. Castle faces an additional difficulty in that it did not at the time purport to terminate the contract either on account of De Montfort's repudiatory behaviour or at all. Vitol v Norelf, above, shows that a failure to perform may sometimes signify to a repudiatory party an election by the aggrieved party to treat the contract as at an end. The suggestion that Castle's "failure to perform" had by 20 April 2005 achieved this result is simply hopeless – 20 April is no more than the date by which, on the assumption that no order had been placed on 19 January 2005, an order required to be placed for the first quarter. By that date no controversy had emerged as to the status of the first order. There is the additional point that the dishonest conduct relied upon by Castle as repudiatory had not by then occurred. However there is an even more fundamental point which is that, in the light of the controversy which did ultimately emerge over the status of the first order, it is in my judgment quite impossible to regard Castle's failure to place orders, whether for the first, second, third or fourth quarters or indeed for all of them as unequivocally signifying an election to treat the entire Supply Agreement as at an end. Indeed, even as late at 3 May 2006 Castle was still reserving its right to treat the Supply Agreement as subsisting.
45. For this reason alone it is unnecessary to consider a further argument of Mr Marshall to the effect that Miss Swaby was additionally dishonest in that she can, at any rate on and after 30 April 2005, have had no bona fide belief that De Montfort could satisfy the first order. The judge did indeed find that De Montfort could not have satisfied the order – see her findings at paragraphs 87 and 93 of her judgment, the latter referring to the fact that De Montfort had by April 2006 disabled itself from so doing by selling off substantial quantities of irreplaceable artwork. However it was never suggested to Miss Swaby at trial that she was in this additional sense dishonest and it is too late to raise the point now, even were it relevant which it is not.
46. The conclusion which I have reached is therefore that it was De Montfort who repudiated the agreement by its solicitors' letter of 18 April 2006, in which it indicated unequivocally that it regarded itself as discharged from any further obligation by reason of its acceptance of Castle's repudiatory breach. There was no repudiatory breach by Castle and De Montfort was in consequence itself in repudiatory breach of contract by indicating a clear refusal further to perform.
47. This was an outcome on which we were not directly addressed, although it was inevitable in the event of partial success by Castle in its arguments advanced on the appeal. We were however addressed on the relevant principles in the context of other possible outcomes.
48. The first consequence is that De Montfort's claim for damages for failure by Castle to place orders in the second, third and fourth quarters must succeed. For the reasons already discussed it is not in my view open to us to conclude that the confusion over the status of the order for the first quarter rendered performance in subsequent quarters impossible. De Montfort neither refused access to Castle for the purpose of making its selection nor made such access conditional upon performance of the disputed order. It is true as I have already observed that performance in the second and subsequent quarters was never overtly discussed between the parties, but Miss Swaby on more than one occasion suggested to Mr Sheleg that he should meet with her at De Montfort's premises. Whilst the context of these suggestions was plainly the inspection of stock represented by the disputed order, it must have been clear to Castle that there was no impediment to its attending for the purpose of inspecting stock with a view to placing orders for subsequent quarters. The position was simply that Mr Sheleg had no intention of placing such orders. There is no claim by De Montfort for loss of profit in respect of the first quarter because the judge disallowed a late amendment designed to introduce such a claim. However I see no answer in principle to De Montfort's claim for loss of profit in respect of the second, third and fourth quarters, Castle's liability in respect of its failure to take goods during those quarters having already accrued due before De Montfort purported to terminate the contract on 18 April 2006.
49. The position after 18 April 2006 is more complex but in the light of the facts there is in my view only one possible outcome. Castle did not immediately accept De Montfort's repudiatory breach as terminating the Supply Agreement. Indeed by its solicitors' letter of 3 May 2006 it reserved the right to treat it as subsisting and moreover called for performance, albeit the judge described the request for facilities to review stock as pure tactical window-dressing, as Castle through Mr Sheleg was never ready and willing to place orders. De Montfort's repudiation was formally accepted by service of the counterclaim in October 2007, there having been no attempt by either party to perform in the interim.
50. De Montfort can, in my judgment, maintain no further claim against Castle in respect of non-performance after 18 April 2006. De Montfort was not expecting performance – on the contrary it acted as if it had an accrued right to recover damages for Castle's anticipatory refusal to perform during this period. It did not have such a right, but the fact that the contract subsisted does not mean that De Montfort can now claim damages in respect of Castle's actual non-performance between April 2006 and October 2007. As from 18 April 2006 De Montfort was in actual breach of contract in failing to use reasonable endeavours to allow Castle facilities to have first choice of product, to ensure adequate supplies of product and generally to perform its obligations under the Supply Agreement. Castle's obligation to accept product was dependent upon performance of these obligations by De Montfort. Accordingly, De Montfort's actual breach after 18 April 2006 prevented performance of Castle's obligations from falling due and/or justified Castle's non-performance – see Treitel, The Law of Contracts, 12^th Ed at paragraphs 18-019 and 18-024, Chitty on Contract 13^th Ed Vol 1 paragraph 24-002 and c/f Sinason-Teicher inter American Grain Corporation v Oilcakes and Oilseeds Trading Co Ltd [1954] 1 WLR 935 at 943 per Devlin J.
51. It is equally clear in my judgment that Castle can recover no damages from De Montfort consequent upon De Montfort's repudiatory breach of the agreement. Whilst Castle did not immediately terminate the contract on account of De Montfort's repudiatory breach, Castle was neither ready nor willing to perform the contract itself and it did not seek further performance from De Montfort. In such circumstances Castle can in my judgment maintain no claim against De Montfort. The situation is analogous to that discussed in cases such as Braithwaite v Foreign Hardwood Company (1905) 2KB 543, British and Beningtons Ltd v North Western Cachar Tea Co (1923) AC 48 and Cooper, Ewing & Co Ltd v Hamel & Horley Ltd (1923) 13 Ll L Rep 590. Cases such as these establish the principle that a repudiating party has a defence to a claim in respect of that breach by the innocent party if he can establish that, at the time of the repudiation, the innocent party was already irremediably disabled from performance, provided that that inability to perform on the part of the innocent party is not itself attributable to the repudiatory breach. The same result must in my view follow if it can be shown not that the innocent party was disabled from performance but that he had no intention of performing. Castle's unwillingness to perform was not a consequence of De Montfort's repudiatory breach, it long pre-dated it. The problem of course more usually arises in a case where the repudiation is immediately accepted as terminating the contract. In such circumstances, as explained in Chitty at paragraph 24-023 and footnote 57:-

"If the breach is accepted, the innocent party is relieved from further performance of his obligations under the contract. He is likewise relieved from proving, in any action against the party in default, that he was ready and willing at the date of the renunciation to perform the contract in accordance with its terms. It follows that it is no defence to liability in such an action to show that, if the contract had not been renounced, the innocent party would not at the time fixed for performance have been able to perform it, aliter, if at the time of the renunciation there was already a breach of contract (albeit unknown) on the part of the innocent party."

The present case is of course different since Castle did not accept the repudiatory breach until eighteen months later and did not at any stage in the interim seek performance of the contract or assert an entitlement to damages for its breach. Its counterclaim for loss of profits in respect of part of this period has in such circumstances an air of complete unreality. As a matter of analysis however in my judgment it fails for the same reason that a claim by an innocent party who was at the time of repudiation already irremediably disabled from performance fails. In this regard I have found most helpful the exposition of the principles by Sankey J in Cooper's case. That was a case in which the plaintiff sellers of toothbrushes to be manufactured in Japan and despatched to the United Kingdom had, before what was assumed to be a repudiation by the defendants on 16 April 1919, put it out of their power to perform the contractual shipment, which was required to be made by the end of April. The plaintiffs, thinking that the defendants were trying to cancel the contract, although they had not done so, had in March stopped the shipment and cancelled the letter of credit in favour of their Japanese manufacturer suppliers. It was therefore a case of actual inability to perform, but it was brought about by an unwillingness to perform. In my judgment Sankey J's remarks must be equally applicable in the perhaps unusual case where an innocent party does not accept the repudiation, but does not thereafter press for performance and yet belatedly claims damages in circumstances in which it can be shown, as here, that he had had since before the repudiatory breach a settled intention not to perform the contract. At page 593 Sankey J said this:-

"In my view, Braithwaite's case only lays down or reiterates a rule something in the nature of an estoppel or waiver as applicable to a certain state of facts. It means no more than this, that, if one person by an anticipatory breach of contract induces another person to whom he has contracted not to complete the contract, the first person cannot be heard to say subsequently that the second person is not ready and willing to perform it: see Cort v The Ambergate Rly Co (1851) 17 A & E (NS) 127, and at p. 144 where Lord Campbell says:-

"We are of opinion, however, that the jury were fully justified on the evidence in finding that the plaintiffs were ready and willing to perform the contract, although they never made and tendered the residue of the chairs. In common-sense the meaning of such an averment of readiness and willingness must be that the non-completion of the contract was not the fault of the plaintiff, and that they were disposed and able to complete it if it had not been renounced by the defendants."

Suppose, for example, A orders a number of wooden boxes from B to be delivered within a certain time and B purchases the wood to make the boxes, but before he has actually made them A repudiates the contract and is sued for damages; he cannot then be heard to say that B was never ready and willing to complete the contract and deliver the boxes within the stipulated time, if and because the reason for B not being ready and willing is that A has repudiated the contract; and it is therefore necessary for B to prove that he was ready and willing to complete. It was held in Braithwaite's case that the facts there disclosed did constitute a waiver by the defendants of the performance by the plaintiff of the conditions precedent which would otherwise have been necessary to the enforcement by him of the contract (see the judgment of the Master of the Rolls at p 551). No new law was there laid down, but the Court merely applied familiar principles to particular and somewhat peculiar facts. The true rule is that, although it is not necessarily obligatory for a man whose contract has been repudiated to go on with and complete it or to prove that he was always able and willing to complete in order to succeed in his action, it is none the less open to the party repudiating to show that the other was never in a position to complete and could not possibly have done so at any time; and if he can show this he is not liable in damages.

That I find to be the position in the present case. The plaintiffs were never ready or willing during the month of April to complete the contract; and defendants' repudiation in no way prevented the plaintiffs from being ready and willing to complete."

That reasoning is in my judgment equally apposite here. In answer to Castle's counterclaim De Montfort is entitled to rely upon Castle's lack of readiness and willingness to perform which was in no way induced by or consequent upon De Montfort's own repudiatory conduct. See also Fercometal Sarl v Mediterranean Shipping Co [1989] AC
788 where the above passage from the judgment of Lord Campbell CJ in Cort v Ambergate is cited with apparent approval by Lord Ackner.

52. Even if the foregoing analysis is wrong, still in my judgment Castle's settled intention not to perform is relevant to the assessment of the damages recoverable consequent upon De Montfort's repudiatory breach. At the conclusion of the passage from Chitty, paragraph 24-023, which I have cited above, having observed that in the paradigm case it is no defence to liability to show that, if the contract had not been renounced, the innocent party would not at the time fixed for performance have been able to perform it, the learned editors continue:- "although proof of such inability to perform might possibly be material in the assessment of damages". In my judgment proof of a settled intention not to perform must equally be material. It is tantamount to a finding that Castle would not have performed the contract. In such circumstances Castle cannot recover loss of profit which is posited upon performance which the judge has found would not have taken place.

Quantum

53. The amount to be awarded to De Montfort in respect of its loss of profit for the second, third and fourth quarters is likely I think to be simply three-sevenths of that which the judge awarded in respect of the longer period. However we heard no argument on the question whether the amount recoverable is simply a straight proportion and if this point is not agreed I would invite written submissions on it.
54. I must however deal with one point relevant to the quantum of De Montfort's claim which was argued before us. This arose out of the judge's treatment at paragraph 106 of her judgment of sales by De Montfort of the stock, or some of it, set aside in anticipation of supply against the first quarter order. De Montfort argued that insofar as such sales were achieved to its customers other than Castle, those sales had been at the expense of other orders which would have been placed by the same customers. Thus De Montfort argued that such sales as it achieved were not in substitution for the sale to Castle and ought not therefore to be taken into account by way of mitigation of its loss recoverable from Castle. The point was in fact ultimately irrelevant since the judge concluded that the disputed order was unenforceable. However at paragraph 106 of her judgment she said this:-

"Had I been persuaded that the disputed order was enforceable I would not have been satisfied, on the limited evidence, that the sales of the order stock that were achieved by De Montfort were at the expense of other orders which would have been placed by client galleries. Such confusion surrounds the question as to precisely what stock De Montfort had in fact allocated to the disputed order, what stock it had or had not commissioned, what stock it had sold and when and what stock remains. There is no information as to the prices achieved on sale or to whom the stock was sold, even by way of sample sales. It appears that De Montfort kept no records. The only evidence that sales were at the expense of other orders which would have been placed is the oral evidence primarily of Miss Swaby. That would not be sufficient to satisfy this court that, for example, the fact that a large number of Barsbys were sold off to third parties meant that De Montfort was unable to see other artwork either by Barsby or other popular artists."

55. The appearance of that paragraph in the draft judgment circulated to the parties before it was formally handed down led Castle to seek "clarification" and in particular to suggest that the court had failed to consider whether De Montfort would likewise have made substituted sales in respect of the second to eighth quarters which would have eliminated its loss. The judge dealt with this argument in a supplemental judgment which she delivered on 28 April 2009. Like her, I am satisfied that the suggestion is both opportunistic and misconceived.
56. The point is opportunistic because it was not raised at trial. Indeed, in the Agreed List of Issues to which I referred at paragraph 24 above, the point is specifically identified as arising in relation to the first quarter but no so identified or raised in relation to subsequent quarters – compare sub-paragraphs 4.1 and 4.2 of the List of Issues set out below:-

"4. What sums (if any) are recoverable in the Claimant's claim (in the event of that party's success its claims). In particular:

4.1 (in the event that the Claimant established that the Defendant is in breach of the disputed Order) whether the Claimant suffered recoverable lost profits in the sums alleged in the Amended Schedule attached to the Particulars of Claim (or any other sums); and in particular

4.1.1 whether the Claimant has taken reasonable steps to mitigate its losses;

4.1.2 whether (and if so to what extent) the sales of the Order stock that were achieved by the Claimant were at the expense of other orders which would have been placed by its client galleries;

4.1.3. whether it should be assumed, in the calculation of damages, that the Defendant would have exercised its right under clause 9 of the Supply Agreement to return 10% in value of the goods to be supplied thereunder; [now conceded]

4.2 (in the event that the Claimant established that the Defendant is in breach of the Supply agreement) whether the Claimant suffered recoverable lost profits in t he sums alleged in the Amended Schedule attached to the Particulars of Claim (or any other sum) (such issue to include the same sub issue as identified at 4.1.3. above)."

Consistently therewith no argument was addressed at trial to the effect that De Montfort would have achieved substitute sales in respect of the subsequent quarters, which would have reduced or eliminated its loss, a point upon which the burden of proof lay upon Castle.

57. The point is misconceived because it is a fallacy to assume that any argument about substituted sales achieved in relation to the stock set aside against the first quarter order can simply be transposed forward as relevant to subsequent quarters in respect of which no orders were placed and, ex hypothesi, no stock set aside. In relation to the first quarter, where sales had been made, the judge rejected De Montfort's argument that such sales were not to be regarded as substitute sales because, as a result of De Montfort's failure to keep proper records, too much confusion and uncertainty surrounded the situation to enable her to accept that De Montfort's customers purchased this material only at the expense of further orders which otherwise they would have placed. I agree with Mr Nash that this cannot be regarded as a general finding about the state of supply and demand in the commercial contemporary art market.
58. It is true that at paragraph 81 of his Witness Statement Mr Sheleg said this, in relation to quarters subsequent to the first quarter:-

". . . It was an important feature of the Supply Agreement that Castle Galleries had the right to pick and to choose 100% of the best of De Montfort's original art work and limited edition prints and 75% of APs. These products would be the most sought after by the rest of De Montfort's customers and, if not purchased by Castle Galleries, would have sold to De Montfort's other customers in any case. Therefore, there should have been no difficulty whatsoever in De Montfort selling this stock to their existing customers, and therefore no loss. The same arguments as set out above in relation to de Montfort's claim for lost profits under the disputed order apply with equal force in relation to this aspect of De Montfort's claim."

It is furthermore the case that this evidence was unchallenged. But as the judge observed in her supplementary judgment, this evidence did not relate to a pleaded issue, was consequently neither cross-examined nor further explored and was not relied upon in submissions.

59. In my judgment therefore there is no basis upon which Castle can now successfully argue that in view of the state of the commercial contemporary art market at all relevant times De Montfort have suffered no loss in respect of Castle's failure to perform during the second, third and fourth quarters because all of the material which might otherwise has been ordered by Castle could have been disposed of without overall loss to De Montfort. Such a conclusion could only result from a far-ranging enquiry which Castle never asked the court to undertake.

Conclusion

60. I would therefore allow the appeal to the extent of reducing the award of damages to De Montfort in the manner I have indicated. If the appropriate figure is not agreed I would invite written submissions on the point. I would dismiss Castle's appeal against the dismissal of its counterclaim.
61. If my assumption is correct that the recoverable damages are simply three-sevenths of the amount awarded by the judge, De Montfort's recovery will be £442,442.04, i.e. less than its Part 36 offer, the existence of which informed the judge's award of interest at 8% over base rate and partially informed her award of costs. However, whether the figure ultimately agreed or determined is either less or more than £500,000 I would in any event invite further brief written submissions on (i) the appropriate rate of interest on the award of damages and (ii) the appropriate order for costs both here and below.

Lord Justice Jackson :

62. I agree.

Lord Justice Maurice Kay :

63. I also agree.