B e f o r e :
LORD JUSTICE MOSES
LORD JUSTICE TOMLINSON
LORD JUSTICE FLOYD
|| Lupofresh Limited
||- and -
||Sapporo Breweries Limited
(A company incorporated under the laws of Japan)
(Transcript of the Handed Down Judgment of
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Peter Knox QC and Marcus Dignum (instructed by Roythornes) for the Appellant
Andrew Green QC and James Segan (instructed by Baker & McKenzie LLP) for the Respondent
Hearing dates : 24, 25 April and 12 July 2013
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Tomlinson :
- This case, surprisingly as some may think, is about the sale by a Japanese brewer of hops grown in China to a company based in Kent. The Appellant ("Lupofresh"), Defendant at trial, is an English company which trades in hops for use in the production of beer. The Respondent ("Sapporo"), Claimant at trial, is a Japanese company whose primary business is brewing and selling beer on the domestic and international markets. At all material times Sapporo had an Agribusiness Division, which until it was closed down in 2009 as loss-making likewise traded in hops.
- In March 2005 Sapporo and Lupofresh concluded four contracts for the sale by Sapporo to Lupofresh of quantities of hop extract from the production in each of the crop years 2004-2007 of Marco Polo hops. Marco Polo hops are grown only in China and particularly in Xinjiang Province, and are known for their high alpha acid content. Alpha acid is the bittering agent used in beer production. In each case the contractual quantity was expressed in terms of a weight of alpha acid.
- In September 2005 Sapporo told Lupofresh that it might be unable to fulfil the order in respect of the 2005 crop. In consequence (a) a new contract was entered into providing for supply from the 2003 and 2004 crop years and (b) the contract for 2005, designated 05-068, was in due course cancelled and replaced by contract 08-019, which provided for the sale of a similar quantity of alpha on the same terms from the 2008 crop.
- The contracts for supply from the 2007 and 2008 crops gave rise to difficulties.
- The contract for supply from the 2007 crop, originally designated contract 07-018, was renegotiated and performed on terms substantially less favourable to Lupofresh than those of the original contract. In April 2008 Lupofresh paid for the goods supplied pursuant thereto.
- Contract 08-019 for supply from the 2008 crop was also renegotiated and performed on terms substantially less favourable to Lupofresh than those of the original contract. The goods were duly delivered pursuant to the revised terms by May 2009. The contractual price, €1,016,248.20, fell due sixty days after delivery, i.e. by 10 July 2009, but Lupofresh did not make payment.
- Sapporo pressed for payment. In email correspondence between August and December 2009 Lupofresh complained that Sapporo had "insisted" on the variations to the contracts in the light of its "inability or reluctance to supply the full quantity on the agreed terms" and that Lupofresh had in consequence incurred additional costs of US$7,605,459.05 in meeting its own commitments to those to whom it had on-sold. Lupofresh suggested a compromise whereby it paid Sapporo for the products supplied from the 2008 crop at the originally agreed price, US$24 per kg alpha, which would have resulted in a payment by Lupofresh to Sapporo of US$506,708.16.
- No compromise was reached and on 20 January 2011 Sapporo commenced the present proceedings, claiming payment of the outstanding price. At paragraph 17 of the Particulars of Claim it was averred that the law applicable to the dispute is the law of Japan, albeit the Claimant did not "at this stage rely on any material difference between the law of Japan and the law of England and Wales". Lupofresh counterclaimed, alleging inter alia that the variations to the two contracts had been induced by duress and/or did not preclude Lupofresh's claims for damages arising out of Sapporo's failure to perform the originally agreed terms. The counterclaim had by now increased in amount. Lupofresh did not at this stage engage with the contention that Japanese law was applicable.
- By the time the trial came before Bean J in May 2012 the Defence and Counterclaim had, I think, been amended on at least two occasions and the judge also had before him a proposed further very late re-amendment which amplified the allegation of Lupofresh that the variations had been procured by misrepresentation. Thus at trial Lupofresh admitted that the varied price for the 2008 crop was payable but asserted that it was entitled to set off in extinction thereof its far greater counterclaim. This by now was pursued upon the basis of, inter alia, duress, intimidation, repudiatory breach of contract and misrepresentation. Lupofresh's approach to the contention that Japanese law governed the dispute was that this "must be proved" and Lupofresh made little effort to plead the provisions of Japanese law upon which, in the event that the contention was proved, it would need to rely in order to make good its counterclaim. On the central issues of duress and intimidation the plea was simply that "If and insofar as the law of Japan applies, the Defendant will contend that the position is substantially the same as under English law", albeit the relevant provisions of the Japanese Civil Code were identified. The Claimant's particularised case as to the applicable provisions of Japanese law was contained in its Re-Amended Reply and Defence to Counterclaim, admittedly served only twelve days before trial, albeit in part foreshadowed in an earlier version. Fortunately the parties' respective expert witnesses on Japanese law (Professor Masuda for the Claimant and Attorney Kikuchi for the Defendant) had exchanged reports in March and in the course of a subsequent meeting in April had reached a very large measure of agreement as to the relevant content of the applicable Japanese substantive law.
- Bean J decided that the contracts were indeed governed by Japanese law. He considered separately the question by what law are the claims in tort or its Japanese equivalent governed. I should mention that Chapter 5 of the Japanese Civil Code in the translation which we have is entitled "Torts". The judge concluded that Japanese law governs these claims too. It is not now contended that the claims in tort are governed by a system of law other than that which applies to the contracts. The judge went on to hold that the facts which he found did not give rise in Japanese law to a right to rescind the variations to the contracts on the ground of duress. Similarly the requirements for a cause of action founded on the intentional or negligent infringement of rights were not made out. The claim in misrepresentation failed on the basis that Lupofresh had not shown that the misrepresentations alleged had induced it to agree to the variations to the contracts. The lack of a causal nexus was as fatal in Japanese law as it would have been in English law.
- The upshot was that the claim succeeded and the counterclaim failed. The judge himself gave permission to appeal. I suspect that he was influenced in so doing by his observation at paragraph 55 of his judgment that "If English law had applied the emerging doctrine of economic duress would . . . assist Lupofresh", a proposition for which he cited as support the decision of Christopher Clarke J in Kolmar Group AG v Traxpo Enterprises Pvt Limited  2 Lloyd's Rep 653. This was in my view an incautious and unfortunate observation for the judge had heard no argument on the point, deciding at an early stage that Japanese law governed, and moreover Kolmar was itself a case in which Christopher Clarke J heard no adversarial argument, the Defendants Traxpo having been neither present nor represented at trial. In so saying I do not intend to cast any doubt upon the decision in Kolmar, which the judge thought indistinguishable. Like Bean J we too have heard no argument on the question whether English law would afford relief to Lupofresh. My caution derives from the very fact that economic duress is an emerging doctrine, the bounds of which can by no means be regarded as yet settled. Mr Andrew Green QC for Sapporo made clear that it would have been his submission had it been required that English law would not have assisted Lupofresh which had simply as a result of amicable discussions renegotiated two contracts long before the date for performance had arrived. I express no view on the point.
- Although relegated to point 6 of the Grounds of Appeal, logically the first issue is whether the judge was correct to conclude that the proper law of the contracts was Japanese law.
- There were in all nine contracts concluded between Sapporo and Lupofresh between 2005 and 2008, although contracts (or Purchase Orders) Nos. 5, 6, 7, 8 and 9 all arise out of and are variations of the original four contracts identified in paragraph 2 above. Indeed contract No. 2 was replaced sequentially by contracts Nos. 5, 7 and 9. Although Lupofresh has an argument that the relevant contracts, Nos. 8 and 9, should if necessary be regarded as governed by a law other than that which governs the contract which they replaced, the starting point, as the judge implicitly recognised, must be an examination of the four original contracts.
- The four contracts are in identical form save for contractual quantity and crop year to which they relate. All take the form of a Purchase Order on Lupofresh headed letter paper, with its address in Kent, addressed in turn to Sapporo in Tokyo. Each is written in English. Since the terms are very brief I reproduce below those of the third purchase order, which was in every respect identical to the second and fourth contracts save crop year and which was fully executed without dispute.
Order No: 06-051
Date: 16th February 2005
Description: Marco Polo Supercritical CO2 Hop Extract
Quantity: 26,712kg alpha, plus additional to fill a contained
Crop year: 2006
Price: US$ 24 per kg alpha, CIF UK port
Packing: 200kg lacquered steel drums (manufacture Grief) fitted with rolling rings and full diameter lids, palletised.
Markings: Variety / Crop Year / Batch number . . / Alpha content . . . / Net . . . kg
Delivery Period: CIF UK Port
Payment: End of month following month of delivery
Special Conditions: Drum specification to be supplied immediately.
Analysis certificates, packing list and two samples representing each batch (minimum 50g each) to be sent to Lupofresh offices as soon as available (i.e. prior to shipment)
Analysis – Minimum 50% alpha by HPLC (using ICE2 international standard) All attributes including Heavy metal, Pesticide, Herbicide and Fertiliser Residues to conform to United States (FDA) and European (EU) current food regulations and legislation.
Date: 07. 03. 2005
Please sign and return one copy.
Date . . . . . . . . . . .
LUPOFRESH LTD Supplier . . . . . . . ."
- Pausing there, it is obvious that there is no express choice of law. One can observe, as Mr Peter Knox QC for Lupofresh did observe to the judge, that the expression "CIF UK Port" is one familiarly used in contracts governed by English law, but as the judge said that does not demonstrate an implied choice of English law since such an expression could equally be found in a contract governed by a different system of law, as it is "universal in international maritime trade". Likewise, I agree with the judge that the need to conform to US and EU regulations tells one no more than that the hops were required to be suitable for use in both the EU and the USA.
- The 8th and 9th contracts were both agreed in 2008, the first in January and the second in July, and so it is common ground that the proper law of both those contracts and those which they replaced is to be determined according to the provisions of the Rome Convention, incorporated into English law by the Contracts (Applicable Law) Act 1990. Article 3(1) of the Convention provides that:-
"A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract."
- It is not suggested that the judge was wrong to regard the language in which the contract was written as in this context insignificant. The relevant personnel at Lupofresh did not speak or read Japanese. Mr Knox relied upon two incidents as demonstrating with reasonable certainty an implied choice of English law. Both occurred subsequent to the making of the first four contracts in March 2005. Unlike the common law position, cf James Miller and Partners Limited v Whitworth Street Estates  AC 583, that may not be a bar to reliance on them as indicating, for the purposes of the Rome Convention, the intentions of the parties at the time the contracts were made – see Chitty on Contracts, 31st Edition, paragraph 30-053. Furthermore, it is ultimately the proper law of the contracts made in 2008 which has to be decided.
- The first incident relied upon relates to payment for the goods supplied under the 6th contract, which related to the crop years 2003 and 2004 and, like the 7th contract, arose out of Sapporo's prospective difficulties in relation to the 2005 crop. After delivery of the goods Lupofresh requested a variation to the payment terms because of unexpected difficulty encountered in selling part of the goods supplied. On 27 April 2006 in the course of correspondence concerning this request Mr Hayashi of Sapporo proposed to Mr Hill and Mr Ibbotson of Lupofresh that, amongst other terms, including the payment of interest, if payment of the outstanding balance of US$ 441,179.20 was not made by the end of May, the contracts for the 2006-2008 crop years should be "cancelled at free of charge with the mutual agreement".
- This provoked a response from Mr Ibbotson by email of 3 May 2006 which included the following passage upon which Mr Knox relies:-
"In all my business dealings with customers and suppliers we have never regarded payment terms as material to affect the existence or validity of any contract. Such a view would be upheld by any court in England."
- If it is to be relied upon as evidence of intention regarding choice of law, this correspondence no doubt needs to be looked at in its entirety. Reliance upon two sentences out of context might not be a very reliable guide. Thus the two sentences in question conclude a short paragraph which otherwise reads:-
"I regarded my request as a suggested refinement of agreed terms which I believed were commercially justified but not material to the existing contract. Your reply made it quite clear that you regard revised payments terms as materially fundamental to not only the existing contract but also future contracts. This causes me concern."
For good measure the email ends with a refusal to make the outstanding payment until a reassurance was received that the 2006-2008 contracts would be honoured. However, I agree with the judge that the sentences in question demonstrate no more than an assumption by Mr Ibbotson that if ever there were to be a dispute between his company and Sapporo it would go before an English court. At this stage Mr Ibbotson seems likely to have had in mind that Lupofresh might be sued for the outstanding balance due, in which case such a claim would be very likely to be brought in an English court, as indeed ultimately occurred in relation to the balance unpaid under the 9th and last contract. This implicit assumption which went uncontradicted in the correspondence (payment was in fact made on 1st June 2006) is a slim basis out of which to spell a shared choice of law. I would emphasise that the search is for a choice of law, not jurisdiction, and that it is a choice which must be demonstrated with reasonable certainty. I do of course acknowledge that, at any rate at common law, a choice of jurisdiction may be an indicator as to the choice of proper law – see Compagnie D-Armemente Maritime SA v Compagnie Tunisienne de Navigation SA  AC 572.
- Mr Knox suggested that the argument gains traction in the light of an incident four months earlier in December 2005 when at a meeting at Lupofresh's offices in Kent Mr Hayashi and Mr Ibbotson reached agreement on a variation of the existing contracts, or one of them, it matters not which. Mr Hayashi was accompanied by a colleague, Ms Mika Harada, who acted as an interpreter. Mr Ibbotson's evidence about this meeting, as recounted by the judge, was:-
"For the avoidance of doubt and to cement the agreement, I asked Mika to explain to Hayashi that in England once agreement had been reached we shook hands on the deal which then became legally binding. Having explained this to Hayashi he and I ceremoniously shook hands across my desk. At that moment I knew the deal had been done."
- The judge was dismissive of the significance of this ritual, saying:-
"The ceremonial handshake in Kent might indicate that Mr Ibbotson regarded this as an English contract (as I have no doubt he would have done, if he had thought about it), but it takes more than a handshake to constitute a choice of English law by both parties demonstrated with reasonable certainty. Mr Hayashi was simply being polite. (If the two men had bowed in accordance with Japanese custom that would not have constituted a choice of Japanese law either.)"
- Mr Knox submitted that the judge had not appreciated the significance of what had occurred, Mr Hayashi having shaken hands in order to demonstrate his understanding and acceptance that, as a matter of English law, this was what was required in order to render an agreement legally binding. I have to say that this is grasping at straws. Whether taken individually or in combination these two incidents fall very far short of demonstrating with reasonable certainty an implied choice of English law.
- I therefore agree with the judge that, there being no choice of law within the terms of Article 3, it is necessary to proceed to Article 4, which provides, so far as material:-
"(1) To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.
(2) Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or in the case of a body corporate or unincorporated, its central administration. …
(4) A contract for the carriage of goods shall not be subject to the presumption in paragraph 2……..
(5) Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3, and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country."
- Mr Knox accepts that the characteristic performance of the original contracts is the sale and supply of goods by Sapporo, bringing into play the presumption provided by Article 4(2).
- At this stage I must however refer to the terms of the 8th and 9th contracts, for it is the argument of Mr Knox that the characteristic performance thereunder is not the same as that of the contracts which they replaced. The 8th and 9th contracts are not so numerically designated, but I set out sequentially below their terms:-
"PURCHASE ORDER (07-018 Amended 24.12.07)
Description: Marco Polo Type Hop Pellets
Quantity: 190 Metric Tonnes (net)
Crop year: 2007
Price: USD 6,464 pe Kg. Ex Fubei. Urumqi
Packing: 10Kg Foils / 2 per carton / palletised
Markings: As previously agreed by e-mail
Delivery: Immediate to Degussa CO2 facility, Germany
Payment: End of month following delivery
Special Conditions: Priced based on anlysis of samples sent (USD 64.00 / kilo alpha (ICE2"))
This Order supersedes and replaces contract dated 16.02.05.
Rail Transport and Insurance to Germany to be arranged by Sapporo and invoiced separately.
Sapporo Breweries Limited.
Signature . . . . . . . . Signature . . . . . . . .
Date: 4th January 2008 Date: 2008.01.09
Order No: 08-101
Date: 9th July 2008
Description: Marco Polo Hop Pellets "90"
Quantity: 26,712 kg alpha, plus additional to fill a container (requested)
Crop year: 2008
Price: €44.00 per kg alpha, Ex Fubei
Packing: 2 x 10kg foils per carton/600kg per pallet/Containerised
Markings: Variety / Crop Year / Batch number . . / 2 x 10kg Nett
Delivery Period: Ex Fubei – Before end of December 2008
Payment: 60 days after delivery to Morris Hanbury Limited UK
Special Conditions: This Contract cancels and replaces Contract No 08-019 which replaced 05-058, Priority date to remain at original contract. 150 g samples representing each 10,000 kg produced to be sent to Lupofresh offices as soon as available (i.e. prior to shipment)
Analysis by HPLC (using ICE2 inter-national standard). All pellet attributes including Heavy metal, pesticide, Herbicide and Fertilizer Residues to conform to United States (FDA) and European (EU) current food regulations and legislation.
Sapporo to prepare all documentation, present all documents and load containers. Lupofresh to organise and pay for transport.
Please sign and return one copy.
Date . . . . . . . . . . . . .
LUPOFRESH LTD Supplier . . . . . . . . . . . "
- The 8th and 9th contracts are of course contracts of sale, just as were the original contracts. However Mr Knox submits that the performance which is characteristic of these contracts is not the supply of goods by Sapporo but the surrender by Lupofresh of its rights. The contracts were renegotiated against the background of a dramatic increase in the world market price of hops and alpha acid extract which obtained as from mid-2007 and endured until near the end of 2008. Lupofresh accepts that it had already agreed a 10% increase in price for 2007 but these variations went far further than that. On any view the revised contracts were substantially less advantageous to Lupofresh than were the contracts which they replaced. Thus for both years the new price was more than double that of the old contracts – US$ 64 per kg alpha in 2007 and US$ 61 per kg alpha in 2008. The contracts were for the supply of hop pellets, rather than alpha extract, casting on to Lupofresh the cost of extraction. Transport to a UK port and insurance of the goods in transit was no longer included in the price. Extraction and transport costs alone amounted to a little over US$ 500,000 in each year. Furthermore the contractual quantity which Lupofresh agreed to take in 2007 was projected to be 20% less than the original contractual amount, and in the event the shortfall was greater, since the yield from 190 tonnes metric of pellets proved less than anticipated. Thus Lupofresh ended up paying for what it did receive from the 2007 and 2008 crops approximately four times what it had agreed to pay. The projected shortfall in the delivery from the 2007 crop, 20% or 7,000 kilos of alpha extract, would have been worth about US$ 5M if it had been available for sale at the sort of market prices which obtained in early 2008, which were for a while in the range of US$ 500 – US$ 750 per kg.
- All this notwithstanding, I cannot accept that it is appropriate to regard the performance which is characteristic of the revised contracts as being the surrender of rights by Lupofresh. Mr Knox implicitly recognised the artificiality of this suggestion by his submission that it is only if, as a matter of construction, the revised contracts give up Lupofresh's entitlement to damages for Sapporo's failure to perform the contracts which they replaced that the characteristic performance of the revised contracts should be so regarded. It would I think be surprising if this were the correct approach. According to the Giuliano Lagarde Report on the Rome Convention, OJ EC No. C282/1 at page 21 "Article 4(2) gives specific form and objectivity to the, in itself, too vague concept of "closest connection". At the same time it greatly simplifies the problem of determining the law applicable to the contract in default of choice by the parties." In the light thereof I cannot think that it is appropriate to identify the characteristic performance of a contract by reference to features which are not immediately apparent from the terms thereof. In order to determine whether the revised contracts amount to an abandonment of rights for no consideration, or, as Mr Knox also described them, contracts of gift, it is necessary to compare them with the original contracts, a process capable of being in certain circumstances one of infinite regression. This is hardly a simplification of approach. Moreover, it would be odd if the performance characteristic of a revised contract could differ according to whether it did or did not involve the variation of all the incidents of the contract which it replaces. I have little doubt that the characteristic performance of contracts 8 and 9 is that of delivery of goods by seller to buyer. As Professors Giuliano and Lagarde put it in the paragraph preceding that which I have quoted above "It is usually the case in a commercial contract of sale that the law of the vendor's place of business will govern the contract". So, in my judgment, it is here.
- Finally Mr Knox complains that the judge failed to deal with his point that, by reason of Article 8 of the Rome Convention, the question whether Lupofresh consented to variations to the contracts should be determined by English law, pursuant to which, he submits, duress would invalidate the apparent consent.
Article 8 provides:-
1. The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Convention if the contract or term were valid.
2. Nevertheless a party may rely upon the law of the country in which he has his habitual residence to establish that he did not consent if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in the preceding paragraph."
In dealing with this point I leave out of account that it is by no means clear that the true rationale of the English law approach is that duress vitiates consent – see the discussion in Chitty, op cit, paragraph 7-004/5. The purpose of Article 8(2) is, I have no doubt, to deal with special problems such as ensuring that a party is not found to have contracted by reason of his failure to appreciate that, under the putative proper law of the contract to which he is invited to adhere, consent may be inferred from silence. It thus relates only to the existence and not to the validity of consent. It is so stated by Professors Giuliano and Lagarde at page 28 of their Report. See also the discussion in Chitty, op cit, at paragraph 30-309 and in Dicey, Morris and Collins, The Conflict of Laws, 15th Edition, at paragraphs 32-108/114. The same position obtains under the Rome I Regulation, Regulation (EC) 593/2008. In Chitty it is stated that:-
"Validity of consent
The exceptional principle in Article 8(2) [of the Rome Convention] and Article 10(2) [of the Rome I Regulation] seems likely to be confined to the existence of consent, as opposed to the question of whether consent, admittedly given, was invalidated by mistake, misrepresentation, duress, undue influence or non-disclosure. Whether these factors vitiate consent would be a matter for the putative applicable law, pursuant to Article 8(1) of the Rome Convention and Article 10(1) of the Regulation."
I have little doubt that the question of the effect of duress, if made out, is here a matter for the putative proper law of the contract.
- For all these reasons therefore I agree with the judge that the law applicable to resolve all aspects of the contractual dispute between Sapporo and Lupofresh is the law of Japan. The judge's decision that in the light thereof Lupofresh's tortious counterclaims are likewise governed by Japanese law is now accepted by Mr Knox.
The judge's findings of fact
- In order to set into context the substantive grounds of appeal, I must next set out the judge's findings of fact, which he divided broadly into "the events leading up to the revised 2007 contract" and "the events leading up to the revised 2008 contract". Those sections are preceded by a short introduction as follows:-
"2. Sapporo had a 45% shareholding in a Chinese company called Xinjiang Sapporo Agriculture Science & Technology Development Co. Limited ("XS"), which was established in the 1980s in order to secure hops from Chinese hop farmers which Sapporo could then use for its own brewing purposes or for sale on the domestic and international markets. The other 55% of shares in XS are owned by Toyota (5%) and a consortium of Chinese farmers known as Fubei Farm (50%). Sapporo has 2 out of 6 seats on the board of XS, with Toyota having 1 seat, and Fubei Farm having 3 seats. Neither Sapporo nor XS controls Fubei Farm. XS is, in effect, controlled by Fubei Farm which has 3 out of the 6 board seats, and appoints the Chairman and President. Fubei Farm has close ties with the Chinese central government, and also with the Xinjiang provincial government.
. . .
Marco Polo hops, pellets & extract
6. Marco Polo hops are a bitter hop grown only in China, in particular in Xinjiang, and are known for their high alpha acid content (containing up to 14% alpha acid). Alpha acid is the bittering agent used in beer production. The raw hops can be turned either into pellets, the hops being ground into powder and then turned into pellets to make storage and/or transportation easier, or into "extract" (the extracted form of alpha acid). A lesser quality of hop, an aroma hop, is also available: an example of this is a type of hop known as SA1.
7. Marco Polo hops are harvested in August or September of the crop year, which means that it is difficult to predict how much raw hop and extract will be produced from that harvest. This can lead to problems in the case of forward contracts made in advance of the harvests. Most of the contracts made between Sapporo and Lupofresh were forward contracts. If the hop harvest is adversely affected by, for example, disease or pests, then production will be below expectation, and difficulties can be experienced in supplying forward contracts.
8. As Lupofresh were aware, the Marco Polo hops whose pellets and/or extract were sold by Sapporo to Lupofresh pursuant to the contracts contained in the 1st to 9th Purchase Orders were grown by Fubei Farm. The supply chain for each contract was the same: Fubei Farm sold to XS; which sold to Sapporo; which in turn sold to Lupofresh. Fubei Farm, as the grower, controlled the supply chain (though it is not suggested that they were the only growers of Marco Polo hops).
9. Lupofresh was also aware, throughout the trading relationship, that the extraction facility which was to be used to convert the Marco Polo hops into extract was known as the "Shanshan" facility in Shanghai. According to Sapporo, this was the only facility in China capable of extracting alpha on a commercial scale using the most efficient extraction method (known as the liquid CO2 supercritical method).
Supply problems in relation to the crops
10. In September 2005 Sapporo approached Lupofresh to say that it might be unable to fulfil the order for the 2005 crop (purchase order 05-068). Accordingly the parties agreed to add an extra year to the "contractual period" and executed a new purchase order which provided for the provision of 26,712kg alpha of hop extract from the 2008 crop at the same price and still CIF UK port (purchase order 08-019). Purchase Order 08-019, the 7th in the series, expressly stated that it "cancelled and replaced" purchase order 05-068.
11. There is no dispute between the parties in respect of the 2004, 2005 or 2006 crops.
12. There were problems in relation to the 2007 and 2008 Marco Polo harvests. In particular:
i) The 2007 Marco Polo hops harvest was adversely affected by diseases known as downy mildew and ostrina and by pests known as red mites: this meant that the 2007 hop harvest at Fubei Farm was substantially reduced.
ii) The Shanshan extraction facility was closed down for a substantial period of time, making it impracticable for Sapporo to supply extract (as opposed to pellets). The original purchase orders for the 2007 and 2008 crop (the 4th and 7th Purchase Orders, respectively) required Sapporo to supply extract.
iii) These supply problems were further compounded by the fact that, over the period of the harvesting and sale of the 2007 and 2008 crops, the price of hops on the international market rose dramatically. For example, the price of the alpha extract sold to Lupofresh from the 2007 crop pursuant to the 4th Purchase Order dated 16 February 2005 was to be US$24 per kg of alpha; whereas by early/mid-2008 (when the 2007 product was delivered), the spot market price was €600 per kg of alpha, an increase of about 30 times.
The events leading up to the revised 2007 contract
13. On 20 August 2007 Mr Ujiie emailed Mr Hill to report that XS expected a decrease in Marco Polo production because of bad weather and red mite; said that it would be difficult for Sapporo to increase the amount of supply to Lupofresh in the 2007 crop; and asked them to consider accepting a decreased amount. Sapporo added: "We had made request to the other customer of hop extract regarding 10% raise of price unconditionally. And we had got positive answer from them already. Please consider that our price raise 10% (2.4 USD) from contracted price unconditionally. I promise your that raising amount should be used for secure the raw hop for Lupofresh's extract". Mr Hill replied later that day agreeing to the 10% increase in price for the 2007 crop, and also agreeing to any shortfall in the crop being rolled forward to the following year's contract. He said Lupofresh would be willing to pay $75 per kg alpha for amounts above the contracted quantity.
14. Mr Ibbotson and Mr Hill flew to China to meet Mr Ujiie at Fubei Farm on 7 and 8 September 2007. A contemporaneous report by Mr Ujiie to Mr Hayashi notes that "they [Lupofresh] trust that Xinjiang Sapporo and Sapporo are supplying all their customers with the same ratio of the original volume". He also records an agreement between XS and Sapporo that "the amount supplied to all customers, both Chinese and overseas, would be uniformly reduced".
15. Mr Ibbotson and Mr Hill went on to Sapporo's head office in Japan for a further meeting on 11 September 2007. At this meeting, Lupofresh says, Sapporo made it plain that it would not deliver the agreed quantity (26,712 kg alpha for 2007) unless that quantity was reduced by 20%; and again represented that this was the reduction which Sapporo and XS would ask all their buyers of Marco Polo to accept. I find that the representation as to a proportionate reduction was indeed made in Japan on 11 September. As to quantity, however, Mr Ujiie's notes suggest a less emphatic statement by Sapporo, and an inconclusive discussion:
1) Up until now, Lupofresh has cooperated with Sapporo beer. This year cooperation from Sapporo Beer would also be greatly appreciated and needed. The decline in collection is understandable. However, it would be great for Lupofresh to realize 100% safety.
2) As for Sapporo, it needs to promise to fairly distribute hops purchased by Xinjiang Sapporo accordingly to the conditions agreed upon in the contract. There is a concern that if anything hinders of interferes with the fairness due to some kind of incentive(s), then the quality supplied would decrease to Lupofresh.
3) Furthermore, as for Sapporo, it should be understood and recognised that there may be an increase or decrease by 10% of the quantity supplied since hops are an agricultural product. If the supply to Lupofresh decreases by 20%, then 10% should be cancelled and 10% should be supplied the following year. This should be recognised and accepted.
4) As for Lupofresh, obviously 100% supply is desired. Even though there is a decrease of 20% in collection, and Sapporo still provides 100% then the 20% portion at 54USD would be fine with Lupofresh. Replacement hops would also be fine and if special costs come up then discussion can take place."
16. Later in the month, Sapporo informed Lupofresh that because the alpha extraction plant at Shanshan had been closed down until mid-January 2008 at the earliest, it could supply from the 2007 crop only alpha in the form of hop pellets, not alpha extract. In an email of 22 October 2007, Mr Hill was asked to come to a meeting with XS in Urumqi, the provincial capital and principal city of Xinjiang, because XS was insisting on raising the price of its product and wanted to talk to Lupofresh.
17. Mr Hill made the long journey to Urumqi and had meetings on 10 and 11 November 2007 with representatives of XS (including its chairman, a Mr Huang) and Sapporo. Mr Huang, it appears, announced a substantial increase in the prices charged by Fubei Farm. According to Mr Ujiie's notes, "Sapporo proposed supply of 190 MT [metric tonnes] of MP [Marco Polo] on the condition of a price increase to 64 USD/kg alpha ex Fubei". I find that Mr Hayashi made it plain that instead of alpha extract Lupofresh were only to receive 190 tonnes of Marco Polo hop pellets which was expected to yield 21,000 kilos of alpha (80% of the agreed 26,712 kilos), and only at the increased price of US $64 per kilo, with Lupofresh paying transport costs, to reflect the increased price which Sapporo was going to have to pay XS.
18. Lupofresh's case is that Mr Hill said at the meeting that he agreed to this only under duress and that his company would need to be compensated; and also that there was to be no repeat of this situation in relation to the 2008 crop. I accept Mr Hill's evidence that he said these things, whether in Urumqi or in Japan. As he said repeatedly in his oral evidence, the deal was put to him on a "take it or leave it" basis. He consulted Mr Ibbotson by phone and then agreed. In reality they had no choice. Lupofresh had made onward sale contracts which they could only fulfil by purchase from Sapporo, or in the spot market at 20-30 times the contract price. He was in no position to obtain damages, still less an order for specific performance of the contract (in any jurisdiction: see below), before his company would face claims from buyers which were potentially ruinous in both financial and reputational terms.
19. Mr Ujiie's notes include the following, which I also accept: "Sapporo explained that a claim for damages from Lupofresh would have to end up with Xinjiang Sapporo, and that this would ultimately lead to the closure of XS and the inability to supply any hop products at all. Lupofresh understand this situation."
20. It appears to be common ground that various possibilities to assist Lupofresh were also discussed at the meeting, including the provision of (a) some SA1 hops to be supplied from the 2007 crop at a price of $18 a kilo, and (b) more SA1 hops to be supplied from the 2008 crop.
21. Correspondence then followed from 15 November 2007 to 9 January 2008, in which the parties discussed the wording of the purchase order that was to be raised to replace the purchase order for the original 2007 crop contract. On 9 January 2008 this revised purchase order ("the 8th Purchase Order") was executed by Sapporo and Lupofresh. It provided for the supply of 190 metric tonnes of Marco Polo hop pellets from the 2007 crop at a price of $64 per kilo alpha ex Fubei. The 8th Purchase Order expressly stated that it "superseded and replaced" the previous contract for the 2007 crop (purchase order 07-018).
22. The hop pellets were delivered at Lupofresh's expense to the agreed destination in Germany, where the alpha acid was extracted. This process was completed on 4 April 2008, with the production of 19,474 kilos of alpha acid (rather less than the 21,000 originally mentioned by Sapporo on 11 November 2007). Lupofresh paid for this by the end of April 2008.
Events leading to the revised 2008 contract
23. The spot price of alpha extract was still high in the first half of 2008. On 19 February 2008 Sapporo informed Lupofresh that its price for the 26,712 kilos of alpha from the 2008 crop for Marco Polo would be €49 per kilo of alpha (then US $72), again ex works Fubei, and again in the form of hop pellets: so Lupofresh would again have to bear the transport and extraction costs. Mr Ujiie wrote "I know these price [sic] are very far from our existing contract but we need this price for stable and certain supply".
24. Mr Hill replied by email of the same date reminding Sapporo that he had told them that a repeat of the 2007 situation would be unacceptable, and that the price proposed of €49, together with transport and extraction costs, would make the total about €100, some four times the agreed contract price. However, in the course of subsequent emails Mr Ujiie wrote that:
i) Sapporo would start negotiations with XS and Fubei Farm to secure the contracted amount "if we can get your acceptance for our price in this timing" – and, by clear implication, not otherwise; the same email emphasised that "it is very important for you and us fixing price in early timing of 2008 for secure the amount" (22 February 2008);
ii) Sapporo "needed" the price of €49 per kilo of alpha to secure the amount of hop pellets (11 April 2008).
iii) Fubei "have many chance to sell Marco Polo to new customer with high price; this is completely violation to our contract but the contract do not have 100% valid in China, as you know."
25. Eventually Sapporo offered by email of 3 June 2008 to supply the 26,712 kilos of alpha in the form of hop pellets at €44/kg of alpha, on the same terms as to transport, insurance and extraction as in the revised 2007 contract. This offer was repeated by Mr Ujiie to Mr Hill at their meeting in Japan on 16 June 2008.
26. On 10 July 2008 the 9th Purchase Order for the 2008 crop was executed by Sapporo and Lupofresh. It provided for the supply of Marco Polo hop pellets from the 2008 crop at a price of €44/kg per kilo alpha ex Fubei (purchase order 08-101). The document expressly stated that this purchase order "cancelled and replaced" Purchase Order 08-019 (which in turn replaced 05-068).
27. In November 2008 Sapporo wrote to Lupofresh and asked Lupofresh to accept a 10% reduction in the amount of pellets to be supplied. Mr Hill of Lupofresh agreed to this reduction by email dated 20 November 2008. Following this agreed reduction, 24,040 kg alpha was to have been delivered.
28. Prior to transportation of the hops it became clear that one container of the shipment would be left only partially filled by Lupofresh's order. Accordingly, in order to avoid the wasted costs caused by transporting a small amount of hops in a largely empty container, Sapporo asked Lupofresh if it would agree to decrease the amount to be delivered further. Lupofresh did not respond to this request, but Sapporo sent an outline invoice reflecting these amended volumes (and the total price) to Mr Hill on 17 December 2008. He replied that he was "happy with the way the invoice is structured" by email dated 19 December 2008.
29. In May 2009 the final container containing the 2008 crop of hop pellets was delivered to Lupofresh under the terms of the 9th purchase order. Payment of €1,016,248.20 was due to Sapporo 60 days after delivery (i.e. by 10 July 2009), but payment has never been made by Lupofresh. The Defendant admits that, subject to its counterclaims, that sum is due and owing."
To this I add the judge's findings at paragraph 36, made in the context of his discussion of the case in misrepresentation:-
"36. The tone of the emails sent by Mr Ujiie in 2007 and 2008 was restrained, courteous and often apologetic. He and his company were not hectoring bullies. But despite the apologetic tone it is clear that Sapporo were determined to use their far greater size and bargaining power to pass on some of the losses caused by Fubei's anticipated failure to supply the full amount contracted, and by their unilateral price rises, to Lupofresh. Mr Ibbotson and Mr Hill, by contrast, were desperate for a deal at almost any price. I find that even if Mr Ibbotson had known the truth about the hop harvest – that the overall reduction was only 7%, and that the Chinese were giving preference to their domestic market – he would not have walked away from the negotiations. He would have protested that he was being badly treated, and perhaps tried to "insist" on a lesser reduction; but in the end he would have accepted what was on offer as the least bad option."
- These findings of fact are very largely accepted and indeed relied upon by Lupofresh as entitling it to relief pursuant to the law of Japan. The Grounds of Appeal at paragraph 19, under the rubric "Seventh ground of appeal: miscellaneous wrong findings of fact" contains the following:-
"Further, so far as material, the judge wrongly found, or appeared to find, the following facts:-
1. That Lupofresh was aware that the hops to be supplied to it were grown by Fubei Farm: on the evidence it did not realise that this was Sapporo's only source of supply for Marco Polo hops (if it was);
2. That Sapporo did not make it clear at the meeting on 11 September 2007 that the amount of the reduction from the 2007 crop which Lupofresh was to take was 20%: it was common ground that it did make this clear at this time;
3. That the price of alpha by November 2007 had reached US$ 500 to US$ 750 a kg: on the evidence, by then it was about US$ 200-300;
4. That Mr Ujiie's note of the 11 November 2007 meeting related to a potential claim by Lupofresh for compensation in relation to the original 2007 contract: on the evidence it was clear that this related only to a potential claim for compensation if the original 2008 [contract] was not performed."
- I do not consider that these points are of any real materiality to the issues for decision. In particular, at all stages during the crucial negotiations Lupofresh realised that Sapporo was taking the line that the hops would be supplied from Fubei Farm and that it did not propose to look elsewhere for supplies.
- In the course of the appeal Mr Knox invited this court to make a whole host of further findings, some but by no means all of which are foreshadowed in the grounds of appeal. This approach was partially responsible for the two day estimate for the appeal proving over-optimistic, with Mr Knox completing his presentation of the appeal at only 3.40 pm on the second day of the hearing. It is unnecessary to address the proposed further findings unless they would make a difference to the outcome. I propose therefore to revert to this aspect of the appeal after examining how the issues fall to be resolved pursuant to the law of Japan.
Ground 5 – damages for breach of the original contracts
- The fifth ground of appeal contends that the judge was wrong to dismiss the claim for damages for failure to perform the original 2007 and 2008 contracts and that he wrongly concluded that the law of Japan knows no doctrine of anticipatory breach of contract. I will revert to the issue of Japanese law, but it rapidly emerged that Mr Knox's primary case on the appeal is that as a matter of construction the revised contracts preserve, or do not release, the right to claim damages for non-performance of the earlier contracts. The revised contracts did not, submitted Mr Knox, waive Lupofresh's right to damages but rather entitled Sapporo to render alternative performance. I am not sure that the point was either pleaded or argued before the judge in this manner. The point pleaded at paragraphs 43 and 61 of the Re-Amended Defence and Counterclaim, insofar as I can understand it, is rather a point to the effect that, as a matter of English law, the revised contract did not in either case waive Lupofresh's right to damages for the loss that would follow from Sapporo's anticipatory breach of the earlier agreement "and the termination thereof which it effected". This is not a comprehensible plea as a matter of English law – if there was an anticipatory repudiatory breach by Sapporo of the two original agreements, it is not sensible to think of the revised agreements as accepting the same as terminating the earlier agreements. This is not what the revised contracts by their terms purport to do. The argument seems to involve the result that Sapporo is expected to perform both the original and the revised contract in that whilst Mr Knox was at pains to eschew this analysis, the payment of damages for breach is of course no more than an alternative method of performance – or to put it in the classical form, it is the discharge of the secondary obligation which arises on failure to perform the primary obligation.
- However that may be, it is not suggested that the Japanese approach to the construction of a contract differs from that of English law. As a matter of construction of the revised 2007 and 2008 contracts it is plain that they release Sapporo from the obligation to perform the earlier contracts which they "cancel and replace" or "supersede and replace" as the case may be. The language could not be more clear. The question whether in Japanese law effect is not to be given to these plain words because Lupofresh's agreement thereto was induced by duress is a separate question to which I shall shortly turn. However I believe that much of Lupofresh's case, pleaded as it was by reference to English law concepts, failed to grapple with the simple point that English law does not contemplate the award of damages for an unaccepted anticipatory repudiatory breach and that Lupofresh had agreed to terminate the earlier contracts, not brought them to an end by a process of accepted repudiation. The discussion of the question whether Japanese law recognises a concept of anticipatory breach is likewise to my mind beside the point. Even if Japanese law does recognise a concept that upon a refusal to perform the other party is thereupon entitled to discharge himself and claim damages, that is not what occurred in this case. As the judge succinctly observed at paragraph 49 of his judgment, Sapporo obtained Lupofresh's consent to replace the previous contracts relating to the 2007 crop before the time for delivery of that crop had arrived. The same is true of the contract relating to the 2008 crop.
Ground 3 – a conditional variation
- The third ground of appeal is that the judge wrongly failed to make a finding on Lupofresh's alternative claim that its agreement to the revised 2007 contract was conditional upon compliance by Sapporo with the original 2008 contract. I have grave doubts whether the evidence justifies any more than a finding that Mr Hill said in the negotiations in 2007 that there was to be no repeat of the situation in relation to the 2008 crop and that Sapporo for its part acknowledged that in the event that the 2008 contract was not met, compensation would be due in respect of that breach, i.e. the breach of the 2008 contract. It seems to me inherently unlikely that matters were resolved upon the basis that the variation to the 2007 contract could be revisited in the event that the 2008 contract was not in due course performed according to its original terms. Even if there was a discussion to that effect, which I doubt, it did not result in the agreement of a condition to that effect, which had it been agreed would no doubt have been included in the "Special Conditions" set out in the revised 2007 contract.
- However all that may be, the point raised by the third ground of appeal is as it seems to me wholly misconceived by whatever system of law it falls to be decided. Even if there was a condition to the effect alleged, it was open to the parties subsequently to agree to depart from it, which plainly they did by their agreement to revised terms for 2008. The notion that the agreement to the revised terms for 2008 invested Lupofresh without more with an entitlement to damages for non-performance of the agreement for 2007 as it stood before it, too, was revised is absurd. If, implausibly, there was such a condition, by agreeing to vary the contract for 2008 the parties must be taken to have agreed to dispense with the earlier condition.
Ground 4 - misrepresentation
- I can deal equally shortly with the fourth ground of appeal, which is that the judge wrongly dismissed Lupofresh's claim in misrepresentation in relation to the 2007 contract. Shorn of its many elaborations, which appeared for the first time only in an amended pleading served in the early hours of the first day of trial, this was to the effect that Sapporo represented that the overall shortfall in the 2007 crop, i.e. in the amount needed to supply all Xinjiang Sapporo and Sapporo's customers, was 20%, whereas it was in fact 7%. It is common ground that for a misrepresentation claim to succeed in Japanese law, there must be established a causal nexus between the conduct of the representor and the conduct of the representee – in the words of Advocate Kikuchi, quoted by the judge at paragraph 85 of his judgment, it must be shown that "if not for the negligent misrepresentation by the Claimant, the Defendant would not have agreed to the revised terms and suffered damages". The judge made a clear finding adverse to Lupofresh on this point at paragraph 36 of his judgment which I have set out above. As he observed at paragraph 35, "The difficulty with this claim [i.e. the claim in misrepresentation], whether in English or Japanese law, is that on the evidence before me, assuming every other point in Lupofresh's favour, causation is not proved". This critical point was fully explored in the course of Mr Ibbotson giving his evidence. The reality is that Mr Ibbotson, the ultimate decision maker, was not at the meeting in China on 10 November 2007. If any representation about the shortfall in the crop was made at that meeting, Mr Hill did not report the same to Mr Ibbotson. Mr Ibbotson was simply told, in effect that there was a take it or leave it offer on the table. His instructions to Mr Hill were that if it could not be improved it must be accepted.
- Mr Knox seeks to challenge this clear finding, asserting that it is unjustified in circumstances where Sapporo adduced no evidence to the effect that, "had the truth emerged in the course of negotiations, it would have persisted in its insistence upon a 20% reduction". His submission was that in order to defeat a claim in misrepresentation, a misrepresentor must demonstrate that he would have persisted in his stance "without an excuse". I am afraid that I do not understand this approach. The judge had to ask himself whether, had it known what the true position was, Lupofresh would nonetheless have agreed the proposed terms. If the answer to that was yes, the causal nexus was not made out, as Lupofresh's expert witness in Japanese law accepted.
- In the circumstances the claim in misrepresentation, brought under Article 709 of the Japanese Civil Code must fail. The claim faces other difficulties in that there are other necessary elements of the tort which I am not confident are made out as a matter of Japanese law. I shall touch on this in the context of the overarching Ground 2, which alleges that the judge's approach to Article 709 was flawed and that he should not have dismissed the claim for what may broadly be called intimidation or tortious interference with rights.
Ground 1 - duress
- The first substantive ground of appeal alleges that the judge should have found that Lupofresh's claim to duress succeeds under Articles 96 and 703 of the Japanese Civil Code. Article 96 provides, so far as material:-
"1. Manifestation of intention which is induced by any fraud or duress may be rescinded."
It was not suggested that fraud is here relevant. Article 703 provides what it was agreed would have been the appropriate restitutionary remedy.
- The experts were agreed that duress in Japanese law is any act which causes fear in the other party through the notification of harm that would occur in the future. They were agreed that in order to generate a right to rescission the duress must be illegitimate and that illegitimacy is to be judged in the light of the entirety of the actions of the parties taking into consideration the means and the purpose of the duress. A simple threat not to perform a contract is not without more regarded as illegitimate – unless accompanied by "other special circumstances" it is characterised as an act of free trade. The Japanese courts have never articulated what might constitute special circumstances for this purpose. There is no precedent in Japanese law upholding a plea of economic duress. The experts were agreed that the majority academic opinion or prevailing view is that "economic duress" is not recognised in Japanese law. The evidence demonstrated that there has in fact been little academic debate on this topic and that only two commentators have acknowledged the possibility that purely economic pressure could amount to duress, one, Professor Matsuo, in the context of what we would recognise as targeted malice, where the purpose of the act is solely to inflict damage. Two commentators, Professors Shimoniya and Noumi, have opined that, as summarised by Advocate Kikuchi, "although there are some countries that renounce the effect of agreements in cases where a party who has the economic bargaining power causes the other party to enter into an agreement that is advantageous to the stronger party by using the concept of "economic duress", the Japanese doctrine of duress is not expected to be applied to such cases".
- The judge's task was, in the happy phrase coined by Beatson J in Blue Sky One Limited v Mahan Air  EWHC 631 (Comm), to "determine the trajectory" of Japanese law. Mr Knox submitted that the trajectory was towards recognition of the circumstances of the present case as those in which the Japanese court would, for the first time, hold economic pressure sufficient to constitute duress.
- Although as I have already indicated Mr Knox invited this court to make further findings of fact, the proposed findings relevant to this issue do not in my judgment make the case essentially different from that which the judge considered. The judge accepted that Sapporo had far greater capital resources than Lupofresh and that it was determined to use its far greater size and bargaining power to pass on to Lupofresh some of the losses caused by Fubei Farm's unilateral price rises in 2007 and 2008 and reduction in supply in 2007. He accepted that Lupofresh was, to the knowledge of Sapporo, desperate to obtain any hop pellets or extract which Sapporo would give it in order to supply its own customers because it could not obtain alternative supplies with which to meet its commitments save at the prevailing spot market prices which the judge described as "exorbitant". The judge described Sapporo's behaviour towards Lupofresh in late 2007 as "exploitative".
- It is obvious that Lupofresh could have responded to Sapporo's demands by refusing to renegotiate, if necessary suing Sapporo, in the appropriate jurisdiction, for damages for breach in the event that it refused to perform the original contracts in accordance with their terms. It is not quite clear from paragraph 18 of the judgment whether the judge accepted that Lupofresh could not realistically have obtained such damages for non-performance from Sapporo before themselves facing claims from their own buyers, which were "potentially ruinous in both financial and reputational terms", but I will assume that he did. It is probably implicit in his finding in paragraph 79 that "although they could have refused to renegotiate and sued when the time came, in practice they had little choice given their obligations to their own customers". The judge also found in paragraph 79 that Sapporo could quite well have absorbed the loss itself, which probably involves that Sapporo was capable of delivering the full amount at the originally agreed price and that, as is obvious, whilst it may have been "impracticable" for Sapporo to supply extract during the shutdown of the Shanshan extraction facility, it could have done so by resort to another extraction facility, for example that used by Lupofresh, Degussa in Germany. However none of these points deprives the situation of its essential character. Sapporo was not motivated by malice but by commercial self-interest. Its purpose, still less its sole purpose, was not to inflict loss upon Lupofresh but to persuade it to share some of the financial loss which Fubei Farm, over which it had no control, was intent upon imposing upon it through Xinjiang Sapporo. This is a not unfamiliar situation. In particular the timing problem, that a contracting party may not obtain legal redress from its defaulting contracting partner before being exposed to claims by others which may be resolved more quickly, is a commonplace in international trade. In the light of the guidance given to the judge as to the likely approach of a Japanese court, for him to have regarded it as likely to be a situation in which a Japanese court would for the first time recognise economic pressure as amounting to duress, entitling a party to rescission, would have been both bold and surprising. The trajectory leads the other way.
- Paragraph 45 of Advocate Kikuchi's expert opinion reads:-
"In light of the above, I believe that, unless there are exceptional circumstances, economic duress tends to be denied in Japan. Accordingly, in situations where a claimant threatens to not perform contractual obligations unless the agreement is changed, it may be considered that this is still within the scope of freedom of trade, and it may be denied that such act qualifies as an act causing duress or the act is illegitimate. In this regard, I agree with the conclusion arrived at by Professor Masuda on paragraph 54 of his expert opinion with respect to this point that it may be difficult to succeed in rescinding the agreement under the provisions of Article 96, paragraph 1 of the Civil Code. "
Mr Knox lays great emphasis upon the fact that in their joint opinion the experts acknowledged the possibility that special or exceptional circumstances might one day be found in circumstances where the pressure was economic. I agree with Mr Green that this is to be regarded as normal professional caution. It was of course for the judge to assess whether the circumstances were here in the relevant sense exceptional or special, and we were told that the experts had been instructed not to consider the facts of this case, but in the light of Advocate Kikuchi's view set out above I consider that the judge's conclusion was inevitable. Whilst mindful of the judge's criticism of Professor Masuda as seemingly unwilling to engage in the process of cross-examination, I do not believe that any of the evidence came close to suggesting that anything other than targeted malice was likely to be regarded as sufficient in Japanese law to give rise to a sustainable defence of economic duress.
- In the light of this conclusion it is strictly unnecessary to deal with two further points raised by Sapporo in its Respondent's Notice. These points were argued before the judge but he obviously did not feel it necessary to express a view upon them. The first point arises out of the requirement in Japanese law that in order to maintain a successful claim for duress, it would here be necessary to show both that Sapporo intended to cause fear to Lupofresh and that Lupofresh suffered fear in consequence of the duress. This was a matter upon which the experts were agreed. They were agreed too as to the meaning of "fear". At paragraph 19 of their joint report they said this:-
"As regards the meaning of "fear", there is no requirement of a complete loss of freewill due to fear. What is required in a finding of duress is that the defendant has caused mind of fear or terror and then that such mind of fear or terror has induce manifestation of certain intention as intended by the defendant."
It is perhaps a concomitant of the conclusion which I have already reached as to the trajectory of Japanese law in this area that the experts at no point suggested that fear of adverse financial consequences would suffice for this purpose, although I agree with Mr Knox that their discussion of the concepts of economic duress and inequality of bargaining power would be otiose if a fear of adverse financial consequences were not sufficient. The recognition that targeted malice in the sense of a desire to inflict loss might give rise to the availability of relief presupposes that fear of adverse financial consequences is sufficient. I would accept that Lupofresh has not been able to fashion any very satisfactory meaning of the word "fear" in this context and that in the definition offered by Mr Knox the feared "harm" might not even be serious harm, but I do not see this as necessarily posing a problem. What is "serious" harm is a relative concept and I would expect this aspect of the enquiry to be resolved in the context of the quest for special or exceptional circumstances.
- Lupofresh does however in my view face formidable difficulties in overcoming Mr Green's second point which relates to ratification. The concept of ratification is dealt with in detail in Articles 119-125 of the Japanese Civil Code. Relevantly for present purposes, ratification is only possible after the duress has ceased to be operative, but certain acts carried out after that time will be deemed to be ratification unless "objection is reserved". The experts were agreed that the following amount to statutory deemed ratification:-
i) The acceptance of performance from the party who has imposed duress, who I will call the oppressor party;
ii) The performance by the party entitled to rescind of his own obligations owed to the oppressor party;
iii) A demand for performance from the oppressor party as, for example, in the sale of goods context, a demand for delivery of the goods; and
iv) Again in the context of a contract for the sale of goods and in the case of a buyer having a right to rescind, the onward sale of goods bought pursuant to such a contract, which is regarded for the purposes of Article 125(v) as assignment of a right acquired as a result of a rescindable act.
- In the light of these principles Sapporo contends that:-
i) The contract contained in the 8th purchase order was ratified by Lupofresh: (1) on Lupofresh demanding delivery of the goods, (2) on Lupofresh taking delivery of the goods, (3) on Lupofresh making payment to Sapporo for the goods delivered, (4) on Lupofresh making payment for the transport arranged by Sapporo and separately invoiced, and/or (5) on Lupofresh reselling the goods delivered by Sapporo.
ii) The contract contained in the 9th purchase order was ratified by Lupofresh; (1) on Lupofresh organising and making payment for the transport of the goods, (2) on Lupofresh demanding delivery of the goods, (3) on Lupofresh taking delivery of the goods, (4) on Lupofresh reselling the goods delivered by Sapporo, and/or (5) on Lupofresh varying the terms of the 9th purchase order on two occasions, i.e. in November and December 2008.
- These contentions are as it seems to me unanswerable. The answer given by Mr Knox is that at no material time had the duress been eliminated such that ratification could arise at all and that in any event Lupofresh made sufficient protest. It is necessary for these purposes to analyse with some care in what precisely the duress consisted. It is with respect to Mr Knox insufficiently analytical simply to assert, as he did, that Lupofresh was "still desperate". The duress for these purposes can be summarised as Lupofresh's need for supplies and its fear that Sapporo would not deliver. I agree with Mr Green that this duress cannot be regarded as subsisting once the goods had been supplied. I also reject Mr Knox's argument that Lupofresh can rely in relation to the 2007 contract upon its continued fear that the 2008 contract might not be performed. I do not believe that this point was addressed in the Japanese law evidence, but looked at from first principles one would expect each contract to be examined separately. Once the goods from the 2007 crop were delivered, Lupofresh can have had no subsisting fear that they would not be delivered and there was no inhibition on their, for example, accepting delivery and making payment only under protest and reservation of rights. Mr Knox relies upon the protests made at the time when the contracts for 2007 and 2008 were renegotiated and revised contracts entered into. He submits that the experts did not say that a reservation cannot be made some time before the act otherwise relied upon as constituting ratification. That is true, but the experts did not address the question. Article 125 provides, so far as is material:-
"If, after the time when it has become possible to ratify an act pursuant to the provisions of the preceding article, any of the following events occurs with respect to an act which is otherwise rescindable, it is deemed that ratification has been made, unless any objection is reserved . . ."
Article 125 is only dealing with matters which occur after it has become possible to ratify, i.e. after the duress has ceased to be operative. It is with respect obvious that there must be an element of contemporaneity between an alleged act of ratification and a protest relied upon as effective to deprive the act of its ratificatory character. This is implicit in Advocate Kikuchi's approach at paragraph 57 of her report:-
". . . The effect of legal ratification does not arise in cases where those able to ratify raise an objection (Article 125 proviso)."
- Accordingly, had the point arisen, I would have had little doubt that Lupofresh lost by ratification any right which once it might have had to rescind the varied contracts. That conclusion is reinforced by Lupofresh's failure to articulate its complaints until pressed for payment in respect of goods delivered in 2009.
Ground 2 – intimidation / tortious interference with rights
- The second ground of appeal concerns the judge's treatment of the claim under Article 709 of the Japanese Civil Code, which provides:-
"A person who has intentionally or negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence."
It was common ground that the right to receive goods under a contract of sale is a "right or legally protected interest" within the meaning of this Article. The claim made under this Article is in essence one of intimidation or of a tortious interference by Sapporo in Lupofresh's rights under the unamended contracts for the 2007 and 2008 crop years.
- The experts were agreed that an essential element in the tort is "illegitimacy" although they were not agreed on whether that is a required quality of the intentional or negligent act or an aspect of the infringement of rights. They were also agreed that their difference of opinion in this regard did not amount to a matter of substance as either approach should lead to the same conclusion. The judge regarded them as agreed that there had to be established an illegitimate act. However it also emerged that the experts were agreed that in assessing illegitimacy the proper approach was one of "co-relationship". The more important the right or legal interest infringed, for example an interest in property or an intellectual property right, the less grave the illegitimacy must be in order to establish the tort under Article 709. Conversely, if the alleged tort consists in the infringement of a less important right, as contractual rights are ordinarily considered to be, so the illegitimacy required is correspondingly greater.
- One difficulty with this part of the case is that much of the relevant expert evidence came in the form of additional reports submitted by the experts after the evidence had been completed. Neither expert was cross-examined on this new material and neither had the opportunity to comment on what had been said by the other. This came about because the judge put a question in writing to the experts after the completion of their evidence as he explained at paragraphs 60 and 61 of his judgment:-
"60. Both experts told me that the right to receive goods under a contract of sale is a "right or legally protected interest" within Article 709. It was unclear to me, on reviewing the expert evidence, whether they considered that there can be an infringement of that right before the time for delivery has arrived. The fact that Japanese law does not recognise the concept of anticipatory breach of contract might not necessarily mean that indicating a few weeks in advance one's inability to perform a contract is not a potential tortious infringement within Article 709.
61. I therefore put this question in writing to the experts: under Article 709 of the Civil Code, can it be an infringement of the rights or legally protected interests of the buyer under a contract for the sale of goods for the seller to say, before the time for delivery of the goods has arrived, that he will not be able to deliver the goods unless the buyer agrees to pay an increased price and to accept a reduced quantity?"
The judge accepted Advocate Kikuchi's opinion that this could be an infringement of the rights of the buyer if the sellers' refusal of delivery can be evaluated as illegitimate. He rejected Professor Masuda's unequivocal assertion that just as Japanese law excludes the concept of anticipatory breach, so a refusal to perform in advance of the time for performance could not be tortious.
- Mr Green submits that the judge was wrong to reach this view, which involves a finding that a statement by a party to the effect that he will not perform a contractual obligation when the time for performance arrives is a tortious infringement of a right even though it is not a breach of contract, Japanese law knowing no concept of anticipatory breach, and even though the conduct of which it forms an integral part does not amount to duress. The judge was, he suggested, unwise to make this finding on the basis of untested evidence. There is force in these submissions, but by the same token I do not consider that I could confidently reach any conclusion as to the approach taken by Japanese law to this point. The consequence of rejecting the judge's conclusion would of course be that Lupofresh has failed to establish an essential element of the tort. Since I am satisfied that the judge was in any event entirely right to dismiss the claim under this head, I need express no concluded view on the point.
- Advocate Kikuchi's view, which the judge accepted, was however qualified by reference to illegitimacy. It is worth setting out her answer to the judge's question at a little length:-
"5. As explained previously in my expert opinion (paragraphs 15 and 16), an infringement of rights for the purposes of establishing Article 709 means an act which illegitimately causes another person to suffer damages (an illegitimate act), and that to succeed in establishing a tort when a perpetrator infringes on another person's legally protected rights, a judgment should be made to determine whether or not rights have been infringed from the co-relation of both the infringed interest and the manner of the act of infringement, based on public order and morality, and comprehensively consider other factors in making the judgment (co-relationship theory). To elaborate on my opinion, this means that even if the infringed right or interest is not so significant, if the illegitimacy element was huge or grave, then tort may be found. On the contrary, even if there is very little illegitimacy element, if the infringed right or interest was extremely important or huge, then tort may also be found.
. . .
7. In this Case [the question posed by the judge as recorded at paragraph 61 of his judgment] I believe that by saying that the seller will not be able to deliver the goods unless the buyer agrees to pay an increased price and to accept a reduced quantity before the time for the delivery of the goods has arrived, purely from an objective perspective, the seller is harming the buyers' existing right under the existing contract. However, this fact is not enough on its own to satisfy this second element under Article 709, and thus, in addition to such act of express refusal of performance of the seller's duty, the act must be evaluated as illegitimate.
8. Furthermore, under normal contractual relationship, although contractual obligations under the existing contract must be performed faithfully or agreement must be honoured (pacta sunt servanda), in practice, we often see cases where a party to the contract commences re-negotiation of agreement to change the terms of the existing contract before the time has arrived for such party (as well as the other party) to perform its own obligation, and such negotiation in itself is considered acceptable under certain circumstances and for certain reasons.
9. In the case above, therefore, the act of the seller to say, before the time for delivery of the goods has arrived, that he will not be able to deliver the goods unless the buyer agrees to pay an increased price would not be considered a significant harm to the right of the buyer under normal circumstances. Thus, in order for the tort to be found, I believe there must be a considerable degree of illegitimacy to completely satisfy the second element of torts."
I have no doubt that in their supplementary reports submitted purportedly in answer to the judge's question, both experts went far further than he had anticipated in expressing their views on the wider issue. The judge had to do the best he could in circumstances where, as he observed at paragraph 68 of his judgment, the oral evidence had not given him much assistance on what proved to be the critical question.
- The second ground of appeal proceeds upon the basis that the judge was correct to conclude that for Lupofresh to succeed under this head it had to demonstrate "a considerable degree of illegitimacy". The complaint is twofold: (i) that the judge wrongly proceeded upon the basis that if Sapporo's conduct was not sufficient to amount to duress under Article 96, then it could not be "considerably illegitimate" for the purpose of Article 709 and (ii) that the judge ought in any event to have found considerable illegitimacy.
- The judge did not in fact regard the failure to establish duress under Article 96 as fatal to the claim under Article 709. He did however accept the "obvious logic" of Professor Masuda's opinion that ordinarily "a finding of no illegitimacy of duress in the negotiation of a contract will lead to a finding of no illegitimacy under tort with regard to such negotiations". I agree with Mr Green that it would be surprising and illogical if matters not regarded by Japanese law as sufficient to vitiate the contract on grounds of duress were nonetheless sufficient to constitute a tort with the same financial outcome. With one exception, the appeal on this ground is simply an attempt to recycle under a different rubric the material which was insufficient to found duress, but from whatever standpoint the problem is approached the circumstances are insufficiently out of the ordinary to attract relief. The exception is that Mr Knox contends that the judge ought also in relation to the enquiry as to the considerable illegitimacy of the intimidation or tortious interference with rights to have taken into account the pleaded misrepresentations to the effect that Sapporo was only in a position to supply to each of its customers 80% of the contracted amount and that it intended to treat Lupofresh fairly and in the same way as other customers.
- The judge made no findings about the alleged misrepresentations beyond the somewhat equivocal findings at paragraph 15 of his judgment reproduced above. The alleged misrepresentations relate only to the revised contract for the 2007 crop, not to that for 2008, and had as described above been introduced only on the morning of the first day of the trial.
- It must moreover be borne in mind that at trial the misrepresentations were relied upon as constituting a free-standing tort under Article 709, as the judge records at paragraph 85 of his judgment. The position concerning the alleged misrepresentations is by no means clear cut. Whatever exactly may have been said on 11 September 2007, it is not alleged that Mr Ujiie had until 28 September 2007 calculated that the shortfall would, to his surprise, be only 7%. It is alleged that Mr Ujiie knew by 28 September that there would be enough to supply all domestic customers if Lupofresh and the other major overseas customer, a German company JBS, accepted a 20% reduction. Furthermore, Lupofresh knew as from at least 6 October 2007 (see the email from Mr Hill to Mr Ujiie of that day) that the Board of Xinjiang Sapporo had it in mind to give preference to domestic customers over their export customers, of whom Lupofresh and JBS were the largest. Indeed, one of Lupofresh's complaints now is that when on 10 November 2007 Sapporo made what is alleged to have been its final representation about the need for a 20% reduction because of the crop yield, it had already persuaded JBS to take a 20% reduction. Somewhat confusingly, in the light of the earlier allegation, it is seemingly alleged that having secured the agreement of JBS to a 20% reduction, there was no need to impose a reduction on Lupofresh of more than a de minimis quantity. I do not follow how in such circumstances the domestic customers could have been supplied in full, and whilst it is said that JBS was offered a better deal than Lupofresh, the suggestion as I understand it is that having told JBS and Lupofresh that both must suffer a reduction of 20%, Sapporo is to be criticised for insisting on that reduction from Lupofresh after it had secured the agreement to the same from JBS.
- Lupofresh is able to point to two pieces of documentary evidence. First, an email of 23 October 2007 from Sapporo to Lupofresh describing a delivery to Lupofresh of 21,542.7 kg alpha (which is 80% of the original contract amount) out of the 2007 crop as being "as result of fair partition". Second, Mr Hill's contemporary note of the meeting of 10 November 2007 in which he records Mr Hayashi as having identified two problems:-
1) Marco Polo 80% contract quantity yield.
2) Market in China growing rapidly.
Even so, I do not feel confident that we can in this court make reliable findings of fact about the alleged misrepresentations and I would unhesitatingly decline the invitation to do so. In particular, we are in no position to assess whether the misrepresentations, if such they were, were made intentionally or negligently. The position is complicated by the circumstance that Xinjang Sapporo sat between Fubei Farm and Sapporo and that Fubei Farm, as the judge observed at paragraph 2 of his judgment, has close ties with the Chinese central government and also with the Xinjiang provincial government. I appreciate that Mr Knox suggests that Mr Ujiie was unable to come up with any very convincing explanation, but whatever be the reason his cross-examination is not easy to follow. If findings were needed, I am inclined to think that a remission to the judge would be necessary.
- The question to which any such findings concerning misrepresentation is potentially relevant is whether those misrepresentations, if proved, would be sufficient when added to Sapporo's overall conduct already considered by the judge to justify a finding of "considerable", or "huge", or "grave" illegitimacy when without it the judge was not satisfied that Sapporo's conduct would be regarded in Japanese law as deserving of these epithets.
- That in turn raises the question whether a misrepresentation is regarded by Japanese law as involving, ipso facto, illegitimacy. Mr Knox submits that Professor Masuda in cross-examination gave an answer to this effect at Day 4 page 133. Having read and re-read the passage of evidence in which this answer is given I am not sure that I really follow what Professor Masuda is there saying. As the judge observed there were difficulties with translation but with the best will in the world the evidence is not clear. Professor Masuda was at the time being cross-examined about paragraph 3 of the Supplementary Report of Advocate Kikuchi which seems to proceed upon the premise that a misrepresentation does not ipso facto involve illegitimacy. The crucial questions and answers were as follows:-
"Q. Now, why, if I have negligently misled you into a contract, out of a more favourable contract, why have I not negligently infringed your contractual rights?
A. So long as it fulfils all the elements that's listed, then it is illegitimate.
Q. I see, yes.
A. So, say the negligent misrepresentation or misrepresentation are proven –
A. – for instance, then we no longer argue.
Q. I see. So you prove the negligent misrepresentation and you must prove the other elements of Article 709, then you prove a breach of Article 709?
A. I don't think there would be any debate on the misrepresentation being illegitimate or how far it is illegitimate.
Q. I see, I see. Thank you very much."
I do not think that it is safe to conclude that Professor Masuda was there giving it as his opinion that a misrepresentation is without more illegitimate, not least because it seems inevitable that there would always need to be an enquiry whether the misrepresentation was "sufficiently" illegitimate and yet the Professor appears to be saying that that question would not need to be debated.
- In this regard it should be borne in mind that it was the clear evidence of Advocate Kikuchi that a misrepresentation is not of itself sufficient to meet this requirement of Article 709. The judge set out this evidence at paragraph 76 of his judgment:-
"In his final submissions Mr Green relied on an answer given in oral evidence by Ms Kikuchi to a question about whether the facts alleged in the misrepresentation pleading (paragraphs 48A-K of the Re-Re-Amended Defence and Counterclaim), set out above, could constitute an infringement of Article 709:
"It is difficult for me to answer. But I think these will not be enough. There needs to be more like, maybe, a scheme behind why Sapporo had made these misrepresentations, there was a malicious intent to induce – malicious plan to induce – this contractual agreement for 20% less between Sapporo and Lupofresh. In addition, maybe the way they had – the manner in which Sapporo made a representation and other factors, such as if they were not just negligent acts but any other wilful intent – malicious, wilful, intentional acts that Sapporo did conduct to induce agreement from Lupofresh.""
- It was also the evidence of Advocate Kikuchi that it is open to the court when considering whether the intimidation alleged by Lupofresh is actionable under Article 709 to take into account any proved misrepresentation – see paragraph 7 of her Supplementary Report. Neither expert gave any consideration to the separate question whether a misrepresentation is for this purpose relevant even if found not to have been relied upon by the party to whom made when entering into the subsequent contract. The judge was moreover given no real assistance on the question how a Japanese court would evaluate such misrepresentations with a view to assessing the extent to which they rendered Sapporo's overall conduct sufficiently illegitimate as to be actionable under Article 709. It is true that in her additional, post-trial report Advocate Kikuchi listed various factors which might be relevant, but the only type of case which she was prepared to advance as "probably" engaging Article 709 was a case of targeted malice. There is in my judgment simply no reliable basis upon which the judge could have concluded that the misrepresentations, if proved, would have made the difference between insufficient and sufficient illegitimacy. Indeed, as Mr Green observed, the judge was referred to no precedent or academic commentary which supported the suggestion that it is actionable in Japanese law for a seller to refuse delivery, before the due date for delivery has arrived, save on terms that the contract of sale be varied. In all the circumstances the only safe conclusion to which the judge could come was, in my view, that Lupofresh had not made out a case which would probably succeed in Japanese law.
- For all these reasons therefore I would uphold the judgment and dismiss the appeal.
Lord Justice Floyd :
- I agree.
Lord Justice Moses :
- I also agree.