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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Societa Esplosivi Industriali SPA v Ordnance Technologies Ltd. & Ors [2004] EWHC 48 (Ch) (21 January 2004) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2004/48.html Cite as: [2004] 1 All ER (Comm) 619, [2004] EWHC 48 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st January 2004

Mr Justice Lewison:

Introduction

1. Modern warfare often requires the destruction of assets protected by underground or heavily fortified targets. This requires a weapon with great powers of penetration. One solution is to use a very heavy weapon so as to give the projectile sufficient kinetic energy to achieve the required penetration. But the difficulty with this is that many military aircraft have too little payload capacity to carry weapons of the necessary weight. One possible solution in such a case is to use a weapon with more than one warhead. This kind of weapon is called a "multiple warhead system" (or MWS). In essence it consists of an explosive shaped charge, designed to blow a limited hole in the buried or protected shelter, followed by a penetrator warhead designed to follow through and attack the interior space within the shelter. It works in four stages. First, the warheads, carried by a delivery missile, are delivered to the target. The delivery missile is simply a carrier. The relevant missile in the present case is the Tomahawk. Second, the first warhead, known as the shaped charge, is detonated. The idea behind a shaped charge is that it sits behind a liner of relatively pure metal (such as aluminium or copper). When the shaped charge detonates, it generates an enormous increase in temperature and pressure within the device. This in turn drives the metal liner out of its container. The liner is simultaneously forged into a sharp pointed fragment (called a "jet" because it behaves like a fluid). The jet then proceeds to bore its way into the target, acting like a sharp metal rod moving at extremely high speed. As it bores its way through the target it leaves a tunnel in its wake. This stage is called the "shaped charge execution". The time occupied by this stage is measured in micro-seconds. The third stage consists of the second warhead, called the penetrator or follow through bomb, following the jet down the tunnel and breaking through any remaining protective cover of the target. This is called the "follow through". At the fourth and final stage, the penetrator explodes within the target, and destroys or damages the protected asset.
2. This kind of system has many variables. They include the shape and size of the charge; the shape, size and configuration of the metal liner and the distance from the target at which the warheads are detonated. If the weapon explodes too close to the target, the jet will not have time to form. If it explodes too far from the target, the jet will not be concentrated enough to penetrate it. The distance from the target at which the weapon detonates is called the "stand-off" distance. The target itself must also be considered. If the jet is too effective against a soft target, there is the possibility that the penetrator will pass right through the target before it explodes, causing very little damage to the target itself. Because it is very expensive to carry out physical tests on multiple warhead systems, the preliminary design stages use complex computer modelling. The computer programs simulate the effect of the weapon. Once an effective design has been developed, it can then be physically tested.
3. The design of shaped charges is an extremely specialised field of engineering technology. There are very few professionals who do it, outside government circles. However, Impact Sciences Ltd ("ISL") is an exception. From its formation in 1992 it has been a designer of warheads, and shaped charges in particular. Its business also comprised research into the design of armour and anti-armour warheads, the defeat of hard targets, instrumentation design and initiation systems. An initiation system is a system for detonating an explosive appropriately and efficiently. It sold its business to SEI (UK) Ltd in January 2001.
4. Società Esplosivi Industriali SpA ("SEI") is an Italian manufacturer of explosives for both military and civil uses. It also manufactures munitions and weapon systems. However, it does not have expertise in designing warheads, particularly of the shaped charge variety. So there was obvious scope for profitable collaboration between SEI and ISL and, following the asset sale, SEI and SEI (UK) Ltd. SEI (UK) Ltd has since changed its name to Ordnance Technologies (UK) Ltd, but in general I shall refer to it throughout as SEI (UK).

The witnesses

5. Evidence for SEI was given by Mr Fabio Sgarzi, Dr Olivier Obst, Ingegnere Antonio Gatti, and Mr Kevin Banks. SEI also relied on witness statements made by Mr John Brauneis, Mr George Mavko and Mr Steven Allen.
6. Mr Sgarzi is a commercial executive with SEI. He is a fluent English speaker. I found him a careful and honest witness. Dr Obst is the chief executive of SEI. He gave evidence through an interpreter, although the bundles show that, in ordinary business dealings, his English is at least adequate. He was able to conduct meetings in English. I found him a careful and honest witness. Ing. Gatti is the industrial director of SEI, and an aeronautical engineer by training. He, too, gave his evidence through an interpreter. I formed the impression that, of the three Italian witnesses, he was the least fluent in English. He, too, was a careful and honest witness. Mr Banks has recently retired from Raytheon Systems Ltd. That company is a UK subsidiary of a large American manufacturer of armaments. He, too, was a careful and honest witness.
7. Evidence for SEI (UK) was given by Mr Stephen Cardy, Mr Robin Moat, Mr David Haigh, Dr Robert Golesworthy and Dr Mel Castillo.
8. Mr Cardy is the managing director and sole shareholder in SEI (UK). I did not find him to be a reliable witness. At times he was evasive, either refusing to answer questions directly, or giving unnecessarily long answers which, I thought, were designed more to confuse than to enlighten. Some of his evidence seemed to me to have been made up on the spur of the moment, and could be readily contradicted by contemporaneous documents. The response to a written question posed by SEI's solicitors in correspondence relating to SEI (UK)'s involvement in contracts for multi-warhead systems, written on Mr Cardy's instructions, was in my judgment deliberately deceptive; and Mr Cardy's attempts to explain his response in the witness box served only to confirm that the deceit was deliberate. I consider also that the documents show that his conduct at various times during the story was deceitful.
9. Mr Moat is the programme director of SEI (UK) but he is not a company director. I found him to be an honest witness. Mr David Haigh is also employed by SEI (UK). I found him to be an honest witness. Dr Golesworthy was the founder of ISL. He was a careful and honest witness. Dr Castillo is a long-standing acquaintance of Mr Cardy, and now runs SEI (UK)'s American subsidiary. I did not find him a reliable witness.
10. I also had the benefit of a report by Dr John Miles. He is a mechanical engineer whose expertise is in the area of numerical simulation and analysis for the design of structures and mechanical components under impact and shock loading. Although he is familiar with a wide range of analysis techniques and design processes within that field, he is not, specifically, a weapons expert. Nevertheless, he was not cross-examined on his report and I can, therefore, take it as common ground.

The evolution of a weapon

11. Mr Cardy explained the evolution of a sophisticated weapon in the course of his oral evidence, which I accept on this point. He said that it begins with a series of research initiatives in various fields of weapons technology. The research might take ten to fifteen years to conduct. The research then proceeds to a stage of demonstration to show that the technology is sound. If the demonstrations are successful, the process continues with a series of phases, called design, development and qualification. These programmes can last anything from two to seven years, depending on the complexity of the weapon. If all these are successful, the weapon can then go into production.
12. Mr Moat and Dr Miles explained the process in more technical detail. The origins lie with the customer. The customer will have a requirement to destroy an asset (e.g. aircraft) protected by a target (e.g. a reinforced concrete shelter). The target may be more precisely identified (e.g. by specifying the thickness of the concrete). In some cases the customer will also have a requirement that a particular penetrator should be used in the multiple warhead system. The task of the designer is to design a shaped charge that will enable the penetrator to travel through the target undamaged and deliver its payload to the protected asset. The designer will also work within the constraints of a given diameter, mass and length of the warhead. The first stage is mathematical modelling.
13. The modelling process uses a series of sophisticated computer programs. The first stage involves the use of PARAJET. PARAJET is a computer program developed in-house by ISL (and one of the business assets sold to SEI (UK)). The operator proposes a shape for the shaped charge, based on his knowledge and experience, and then feeds a series of variables into the program. These include such matters as the composition of the metal liner, the size and shape of the casing, the quantity and composition of the explosive and so on. The program will then predict the energy distribution of the explosion, and from that it will predict the size and shape of a hole in concrete that the jet will make. This part of the process uses a series of iterative cycles until a design is found which will produce an entry tunnel of sufficient depth and diameter for the penetrator to perform satisfactorily. Once the best design for the customer's requirements has been identified, the modelling continues to refine the design, using the PISCES program. PISCES is a computer program that is available commercially. Whereas PARAJET is quick but (in relative terms) approximate, PISCES is much slower but much more accurate.
14. The next stage in the design process is to simulate the follow through phase. The follow through phase involves different physics because, although the follow through phase is rapid, it is not so rapid as to make the penetrator bomb behave like a fluid. Thus PARAJET is not used for this phase. Instead the modeller uses PISCES and another program called DYNA2D/3D. The latter are also a pair of commercially available programs. They are less accurate than PISCES, but quicker. So PISCES is in effect used to check the predictions produced by DYNA2D/3D.
15. At this stage in the modelling, the shaped charge is assumed to have done its work in the manner predicted in the first phase. The designer will feed into the computer the physical properties of the target and the penetrator, together with the geometrical definitions of the target, penetrator and tunnel. Using these inputs, the calculations progress by simulating various starting conditions for the penetrator. These mainly represent variations in the initial position of the penetrator relative to the axis of the tunnel. These variations are run to check that the penetrator will pierce the target, retaining sufficient residual exit velocity in all reasonably foreseeable circumstances. The result of these two phases of modelling is to produce a design that is theoretically capable of meeting the customer's requirements. The results of the modelling are presented to the customer in the form of a report. If the customer has confidence in the report, the process moves to the next stage. The explosive packed in the shaped charge container is activated by a comprehensive shock delivered by an initiator. The footprint of the shock-pulse on the explosive affects the way in which the explosive subsequently burns. This is important because the explosion must be focused on the liner in such a way that the jet is forged to the desired shape and expelled at the desired velocity. So this stage in the modelling will feed in information about the initiation system, and an initiation system is designed.
16. The theoretical capabilities of the design must now be tested empirically. Because physical testing is expensive and time-consuming it is kept to a minimum. It also requires the production of a set of engineering drawings. Once the engineering drawings are produced, the computer modelling is run again to check that the performance of the warhead has not degraded. The first test is to test the initiation system in isolation, in order to check that the compressive blow that it delivers correctly distributes pressure over the desired area of contact within a certain period of time. The next test is to fire the shaped charge. The purpose of this test is to measure the characteristics of the jet, which is captured both on high-speed film and X-ray. It is an important test because it will show whether the mathematical modelling has been accurate. It is called a "jet characterisation test". The next practical test is a static firing test. Again this consists of firing the shaped charge alone. But in a static test it is placed against the target and its effect on the target is evaluated. The final test is a dynamic firing test. This involves placing a prototype of the warhead including all components (the shaped charge, the follow through bomb and the initiation system) on a sled, and then accelerating it into the target. Thus the impact of the entire warhead on the target can be evaluated. The test requires both the assembly of a prototype warhead and the construction of a sled. The warhead also has to be filled with explosive.
17. If these four tests are all successful the design is said to have been validated. However, these tests will have been carried out in ideal conditions, which may not exist on the battlefield. Accordingly, the programs are run again, this time feeding in variables relating to the engagement conditions which might be expected to exist at the time of firing. These would include variations in the velocity and angle of incidence of the missile, and variations in pitch and yaw. This stage of mathematical modelling would also culminate in further empirical physical tests. If these tests are successful, the evolution of the weapon proceeds to the stage of development. Principally this consists of the integration of the warhead with a specific missile which will act as its carrier. It requires an understanding of the characteristics of the missile, which can affect the performance of the warhead. The modelling thus far has been conducted on the basis of an assumption of symmetry. But not all missiles are symmetric. So any asymmetry in the missile has to be factored into the ultimate design. Similarly if there is any "clutter" (e.g. an avionics package forming part of the warhead guidance) its effect on performance must be factored in.

Lancer 1

18. In 1994 Mr Cardy was working for Thomson-Thorn Missile Electronics. The UK CASOM (Conventionally Armed Stand-Off Missile) contract was out for bidding. The contract required missiles capable of penetrating a type of target specified in Staff Requirement (Air) 1236. I understand that this was concrete 3 metres thick. Thomson-Thorn Missile Electronics were part of three of the four bid teams, as supplier of fuzes. Mr Cardy was trying to put together a team of companies to produce a warhead system for Hughes Missiles Systems Company, the fourth bidder. The warheads were to be used in conjunction with an air launched version of Hughes' Tomahawk missile (called the Airhawk). It was designed to penetrate hard buried concrete structures. In order to produce the warhead system, Thomson needed a warhead designer and a manufacturer. Thomson itself was to design the fuzes, in the same way that it was to design the fuzes for the other three teams. The MoD recommended Mr Cardy to approach ISL. Thomson had identified SEI as the potential warhead and explosives manufacturer. It had also identified Portsmouth Aviation Ltd "PAL" as its expert in air carriage and test vehicle manufacture.
19. Following a few meetings, ISL and SEI agreed to join the team. Thomson was to be the lead warhead system sub-contractor to Hughes. SEI was to be Thomson's lead sub-contractor for warhead ordnance. ISL was to be the lead sub-contractor to SEI for the design of the shaped charge warhead, for technical liaison with Hughes, for the structure of the system and for predictions of the system's performance in static and dynamic tests. Each contract places on the contractor responsibility for the successful functioning of the component covered by the contract (or sub-contract). The contractor is known as the "design authority" for that part of the system for which he is responsible. Portsmouth was to be the manufacturer of the shaped charge hardware to ISL's design. The rear penetrating bomb was SEI's Mark 81 bomb. The team was called "Team Lancer". The name derived from ISL's previous work on a shaped charge called "Lance". At first there do not appear to have been any written agreements governing the parties' relationships. The Team Lancer MWS was successfully built and tested by the end of 1995. It has been called "Lancer 1". By now it was agreed that the relationship between SEI and ISL should be formalised, and they entered into an agreement, called the First Teaming Agreement, on 11 January 1996.

The First Teaming Agreement

20. The first Teaming Agreement recites the background to it as follows:

"A) SEI and ISL wish to work together to win contracts from Thomson-Thorn Missile Electronics Limited (TME), to carry out development and production of a warhead system known as LANCER, for the Hughes Missile Systems Company (HMSC) Airhawk cruise missile, in its configuration for the UK Ministry of Defence Staff Requirement (Air) 1236 and to win contracts to carry out the development and production of LANCER variants for other weapons systems to be defined.

B) SEI has expertise and resources for the manufacture of a wide range of high quality explosive ordnance.

C) ISL has expertise in the design of a class of warhead systems to defeat all SR(A)1236 targets and has the expertise to asses the effectiveness of such warheads."

21. The operative provisions of the first Teaming Agreement are of little direct relevance to the issues in the action, but they began the pattern followed by later Teaming Agreements. However, the allocation of ownership of intellectual property rights is of some importance. That was dealt with by clause 4. Clause 4 began with two definitions:

" i. "Background" Intellectual Property Rights (IPR) means all information, including inter alia, Patents, Registered Designs, process expertise (and proprietary rights as identified in the Confidentiality Agreement referred to in Clause 1 above) which SEI or ISL use in the achievement of the contract requirements and

ii. "Foreground" IPR is that which results from the bid preparation or from work on the SR(A) 1236 LANCER sub-contract by the application of background information to the contract requirements."

22. Clause 4 b) then went on to allocate ownership of IPR as follows:

"Subject to the terms of the contract negotiated with the UK MOD(PE):

i. Background IPR used in the bidding phase or the SR(A) 1236 development phase contract shall be owned by each party performing its respective bid preparation or development work, and

ii. Warhead system foreground IPR arising from the SR(A) 1236 bid preparation or development contract shall be owned by SEI who shall be deemed to be the warhead system Design Authority

iii. Warhead subsystem foreground IPR arising from the SR(A) 1236 bid preparation or development contract shall be owned as follows:

the forward shaped charge warhead jointly by SEI and ISL who shall be deemed to be the Joint Design Authority, and

the rear penetrating, blast charge by SEI who shall be deemed to be the Design Authority.

Both parties shall require the written permission of the other to exploit the specific SR(A) 1236 warhead configuration for other non-SR(A) 1236 applications.

iv. SEI shall have free user rights of the ISL foreground IPR and relevant background IPR, free of charge, for the SR(A) 1236 programme. For other non-SR(A) 1236 applications, written agreement from ISL shall be required."

23. Dr Golesworthy said (as one would expect) that both parties regarded this agreement as mutually beneficial. For ISL the benefits were that its designs were protected from copying, it had secured a role as designer to SEI in the event that the bid succeeded, and it had joined forces with a credible manufacturer of weapons. As it turned out, the bid was not successful and the MoD awarded the contract to another manufacturer. Thomson-Thorn Missile Electronics Ltd had in fact been the supplier of fuzes to all the bidders, and it continued to work with a rival team led by BAe Royal Ordnance. After a time it became apparent that Thomson-Thorn had a conflict of interest, and it left Team Lancer. Hughes Missile Systems Company became Raytheon Missiles Systems Company ("Raytheon"). I am not sure precisely how that happened, but it does not matter. But SEI and ISL continued to work together.

The Second Teaming Agreement

24. On 1 January 1998 SEI and ISL entered into the second Teaming Agreement. Broadly, the purpose of this agreement was to increase the scope of the collaboration between the two parties. Once again, the recitals set out the background:

"A) SEI and ISL have worked together to carry out the development and production of a warhead system known as LANCER, for the Hughes Missile Systems Company (HMSC) Airhawk cruise missile, in its configuration for the UK Ministry of Defence Staff Requirement (Air) 1236.

B) SEI has expertise and resources for the manufacture of a wide range of high quality explosive ordnance.

C) ISL has expertise in the design of a class of warhead systems to defeat all SR(A)1236 targets and has the expertise to asses the effectiveness of such warheads.

D) SEI and ISL wish to join their expertise and resources to develop competitive and cost effective new generation Multiple Warhead Systems (MWS), for use with current missiles, such as but not limited to Airhawk, Tomahawk, Centaur and US Hard and Deep Buried Bunker."

25. Dr Golesworthy said that the projects referred to in recital D) were all live possibilities, representing business opportunities, and for the same reasons as applied to the first Teaming Agreement, he regarded the second Teaming Agreement as mutually beneficial.
26. Clause 1 referred to the first Teaming Agreement and stated that its provisions "are rendered null and void by this Agreement." Clause 2 described the purpose of the agreement as follows:

"The purpose of the Agreement shall be to form an exclusive relationship between SEI and ISL for the purpose of:

a) Preparing bids, in the name of SEI, to win contracts for the design, development and production of the MWS.

b) Establishing responsibilities and workshare of SEI and ISL in the bid phase and after sub-contracts award."

27. Clause 3 set out the relationship between the parties.

"a) In the bid process, and in any contract gained for the design, development and production of the MWS, SEI will be the Design Authority and lead warhead contractor.

b) ISL will be the exclusive sub-contractor to SEI for the design concept, the performance assessments and the engineering design and testing support to development program, leading to manufacture of the MWS.

c) ISL will not offer its designs, design expertise, assessment capability or development support expertise to any third party in the context of MWS. ISL will continue to undertake work in support of United Kingdom, Ministry of [Defence] ([Defence] Evaluation Research Agency) MWS research contracts."

28. Clause 4 once again dealt with ownership of intellectual property rights. It began with familiar definitions:

"i. "Background" Intellectual Property Rights (IPR) means all information, including inter alia, Patents, Registered Designs, process expertise (and proprietary rights as identified in the Confidentiality Agreement referred to in Clause 1 above) which SEI or ISL use in the achievement of the contract requirements and

ii. "Foreground" IPR is that which results from the bid preparation or from work on MWS sub-contract by the application of background information to the contract requirements"

29. Clause 4 b) then went on to allocate ownership of IPR as follows:

"Subject to the terms of the contract negotiated with the FINAL CUSTOMERS:

i. Background IPR used in the bidding phase or MWS development phase contract shall be owned by each party performing its respective bid preparation or development work, and

ii. Warhead system foreground IPR arising from MWS bid preparation or development contract shall be owned by SEI who shall be deemed to be the warhead system Design Authority

iii. Warhead subsystem foreground IPR arising from MWS bid preparation or development contract shall be owned as follows:

the forward shaped charge warhead jointly by SEI and ISL who shall be deemed to be the Joint Design Authority, and the rear penetrating, blast charge by SEI who shall be deemed to be the Design Authority.

iv. SEI shall have free user rights of the joint SEI/ISL shaped [charge] warhead designs emanating from the activities covered by this agreement.

30. Clause 4 c) said that both parties would require the written permission of the other "to exploit the specific MWS studies or components".
31. Clause 7 provided for the duration of the agreement, which was to run from 1 January 1998 to 31 December 2005. Clause 10 b) said:

"Neither party shall collaborate on the same subject (see Para 3 c) with any other party or person while this Agreement is in force."

The Consultancy Agreement

32. Some time in the autumn of 1998 Mr Cardy left Thomson-Thorn. He incorporated a company called SEI (UK) Ltd. I should make two points about this company at the outset. First, its name, SEI (UK) Limited, was its full name. Unlike SEI, which was an abbreviation of Società Esplosivi Industriali, SEI (UK) was not an abbreviation of anything. Second, although the company was called SEI (UK) Ltd, SEI owned no part of its share capital. SEI (UK) was owned and controlled by Mr Cardy. Mr Cardy's initial purpose in setting up SEI (UK) was to be a sales consultant for SEI. On 29 October 1998 SEI and SEI (UK) entered into a consultancy agreement to regulate their relationship. SEI (UK) was called "UKS" in that agreement.
33. The consultancy agreement was to be governed by Italian law. Although the signed version is in English, it reads as if it had been translated from Italian. Neither party adduced any evidence on Italian law; and I have been asked to assume, in accordance with the conventional presumption, that Italian law is the same as English law, including the rules of equity.
34. Clause 1.1 appointed UKS:

"to be consultant without representation for the promotion of the sale of PRODUCTS as well as for the assistance and administration of CONTRACTS."

35. Products were defined by clause 3.1. They included:

Multiple Warhead Systems

Warhead Systems for GEC and Raytheon

New fuzing systems currently not sold by SEI

Others to be decided from time to time.

36. Contracts were defined as contracts for the sale of products to customers. Clause 2.1 set out UKS's duties. UKS undertook to:

"2.1.1 promote the PRODUCTS and follow the programs relevant to promotional events;

2.1.2 follow the plans of the CUSTOMER and rise its interest for the PRODUCTS;

2.1.3 keep constantly informed SEI on the activities of companies manufacturing products competing and/or similar to the PRODUCTS

2.1.4 assist SEI during the sale, negotiations, stipulation and administration of the CONTRACTS without being entitled to sign CONTRACTS or to take any engagement on SEI's name and/or behalf unless so authorized in writing by SEI;

…

2.1.7 inform regularly SEI on the development of potential sales in EUROPE and USA."

37. By clause 2.2:

"UKS undertakes not to disclose to any third party any technical, commercial or company piece of information concerning the PRODUCTS or the AGREEMENT, except for complying with the commitments of the AGREEMENT as directed by SEI. UKS undertakes to comply with the present Clause also after the AGREEMENT expiration and to return to SEI, within 30 days from the expiration date all the technical and commercial documentation concerning the PRODUCTS."

38. By clause 2.3:

"UKS undertakes not to market and/or manufacture (directly or indirectly) any product competing with the PRODUCTS. UKS also undertakes not to represent nor assume interests in companies competing with SEI in the field of the PRODUCTS."

39. The consultancy agreement was to remain in force until 31 December 2001. Mr Cardy agreed that the relationship created by the consultancy agreement was one that necessarily involved a high level of trust on both sides. On his side, SEI trusted him to seek out business opportunities and report them back to SEI.
40. Some time in October 1998 Mr Cardy made a presentation to Raytheon. The purpose of the presentation was to introduce Raytheon to the new team who were pitching for the contract to manufacture a warhead to be carried by Raytheon's Tomahawk missile. Raytheon were also to manufacture the rear penetrating bomb, called ATAP. The presentation introduced the team members. They were SEI, ISL and another American corporation called Atlantic Research Corporation ("ARC"). The presentation described the respective responsibilities of the various team members. ARC was to be the lead contractor and responsible for warhead fill and assembly for full production. SEI was to be the design authority for the warhead system. It was to be responsible for the development and qualification of the warhead system including the development filling of the shaped charge and the rear penetrating bomb (unless the latter was the Raytheon ATAP or a derivative of it). ISL was to be responsible for warhead design and performance modelling support to SEI. The presentation also puffed SEI's business as the most important Italian manufacturer of military explosives and described its production facilities, turnover and work force. It also described the types of explosive that SEI manufactured, and referred to a proposal to manufacture an explosive called PBX (Plastic Bonded Explosive). This is an insensitive explosive which is required by the US Navy. SEI had a proposal to build a manufacturing plant for this. The presentation went on to describe ISL and its capabilities including its use of sophisticated computer programs used in mathematical predictive modelling of the performance of warheads. One of these was PARAJET. The conclusion of the presentation was that:

"The "teaming" of ARC and SEI can provide Raytheon with an effective and competitive "single warhead" organisation to meet its missile requirements both in the United States and Europe. The teaming combines the design, development and production capabilities residing within ARC and SEI."

41. The presentation did not mention SEI UK at all. However, it is clear from the presentation that ARC were envisaged as part of the team, and anyone in the defence industry would expect that SEI and ARC would, in due course, enter into a Teaming Agreement. Raytheon were clearly impressed enough by the presentation to commission the team to prepare designs for a multiple warhead. But it was to use the Raytheon R-750 KE Penetrator as the rear follow-through bomb. This version of Lancer has been called "Lancer 2". ISL mathematically modelled some 70 variations of the Lancer shaped charge warhead, covering combinations of liner case and initiation geometries.
42. On 11 December 1998 the team produced a document called a Trade Study. Although it was written by Messrs Moat and Townsend of ISL, the front sheet indicated that it was the report of Società Esplosivi Industriali Defence Division; and a note at the foot of the page said that the copyright in the document was the property of SEI S.p.A. The study discussed the four tasks that had been set by Raytheon. These were:

i. To provide a hydrocode computer modelling and engineering analysis of the Lancer multiple warhead system, so as to find the best design capable of defeating a minimum of 20 feet of reinforced concrete;

ii. To predict the performance of the Raytheon follow through bomb into the target;

iii. To model the effect of different offset lateral alignments of the follow through warhead from the central axis of the shaped charge;

iv. To model the effect of the nose cone on the warheads.

43. On 4 October 1999 the team produced another study. This one concerned the design of the initiation system. Again it was presented as report of Società Esplosivi Industriali Defence Division; and a similar note at the foot of the page said that the copyright in the document was the property of SEI S.p.A. The technical material was contributed by Mr Townsend.
44. The next stage was the production of drawings of the finished designs. They were generated in May 1999. They are computer assisted design (CAD) files.
45. Following the production of the drawings, the project moved to the stage of the physical testing of a prototype. A jet characterisation test took place in December 1999.
46. In the latter part of 2000 there were inconclusive negotiations between SEI and SEI UK for the acquisition by SEI of a majority shareholding in SEI UK. Although discussions continued into the summer of 2001, they came to nothing. Instead, by an agreement made on 18 December 2000 SEI UK agreed to acquire the business and assets of ISL. The business and assets included all ISL's intellectual property rights. The practical effect of the acquisition was that instead of being simply a sales agent, SEI UK now became a provider of technical services and expertise. Although no one seems to have realised it at the time, the changed nature of SEI (UK) gave rise to the potential for a conflict of interest. As Mr Cardy said in evidence, SEI (UK) was changing from "an agency organisation to a stand-alone defence company which had its specific interests." With the benefit of hindsight, he recognised that, as things unfolded, a conflict of interest did indeed arise.
47. A static firing test took place in California on 21 January 2001. SEI had reservations about the performance of the warhead, because it had been filled with an unfamiliar explosive. But Raytheon were content with the performance of the shaped charge, and wanted to move to the next stage, which is a dynamic firing test. This was treated as a semi-separate project called "the Lancer No. 2 Dynamic Firing project".

The Dynamic Firing Test

48. By February 2001 Mr Cardy had begun the preparation of a proposal for a dynamic firing test. But a dynamic firing test costs money. Raytheon had only $260,000 allowed for the cost of the test. Mr Cardy therefore proposed to SEI that "we offer the dynamic firing at COST plus 5%." The word "we" refers to SEI. He was enthusiastic about the prospect of a successful dynamic firing test and held out the hope that, if it succeeded, the Lancer warhead might be taken up by the US Navy for its Tomahawk missile, and might also challenge the warhead in use with the Storm Shadow missile (a missile that had been commissioned by the MoD).
49. I should at this stage say something about offset credits. If a foreign arms manufacturer wishes to sell arms abroad, it is often required itself to spend money on the arms industry within the country to which it wishes to sell. That spending might take the form of buying components from a domestic arms manufacturer, or might take the form of funding some improvement to the production facilities of a domestic arms manufacturer. However, the amount which a foreign arms manufacturer spends in the domestic arms industry translates into many times that amount in terms of the permitted level of sales. The permitted level of sales is called the offset credit. Within Raytheon there were personnel who dealt entirely with offset credit. From their perspective it did not very much matter what project they supported or funded, provided that they could obtain offset credit for the sale of Raytheon's products. The $260,000 allocated towards the cost of the dynamic firing test for Lancer did not include any contribution authorised by the offset credit arm of Raytheon; it was simply the amount that the production and engineering department was able to allocate out of their R & D budget. If Raytheon could be persuaded that they would obtain offset credit, they might be willing to contribute more towards the cost of the dynamic firing test. At this time, SEI had two projects which it regarded as being of strategic importance for the company. One was the Lancer 2 project. The other was the construction of a plant for the manufacture of plastic bonded explosive (PBX). The latter project was of more interest to the Italian Ministry of Defence. It was that project that formed the basis of discussions between Raytheon and the Italian authorities, and eventually resulted in Raytheon contributing $2.5 million towards the project. In return Raytheon received some $35 million in offset credits. The Lancer 2 programme was not discussed with the Italian authorities after the end of 1999. However, the Lancer warhead was to be filled with PBX; so the two projects were not entirely divorced from each other.
50. SEI adopted a very cautious attitude towards funding the cost of the dynamic firing test. In essence it was not willing to risk much (if any) of its own money. It wanted commitments from Raytheon before committing itself to sub-contractors.
51. On 13 February 2001 Mr Cardy e-mailed Mr Sgarzi to ask whether ARC and SEI had yet signed a Teaming Agreement.
52. On 31 March Mr Sgarzi e-mailed Mr Cardy to say that ARC had agreed changes to the draft Teaming Agreement. He asked Mr Cardy whether SEI should sign or delay. Mr Cardy replied that SEI should sign: "we need their support with Raytheon".
53. In parallel, preparations were continuing for the dynamic firing test. The test was to be held at the Pendine firing range in Wales, owned by the Defence Evaluations and Research Agency (DERA). However, there were two problems: funding and timing. DERA had offered a reduced price for the use of the range, but were not willing to hold that price beyond the end of May. So any order had to be placed by then. In addition, the warhead had to be filled with explosive. The filling or loading was to be carried out by a Swedish company variously referred to as Bofors and NAMMO. There was a loading slot available in June. In order to secure that slot, the order to load had also to be given by the end of May. If that slot was missed, then the warhead could not be filled before November or December. The effect of missing the slot would be that the dynamic firing test could not take place in 2001, and if and when it did take place, would overrun the budget of $450,000. Mr Cardy relayed this to Raytheon and SEI on 3 May. On the same day Portsmouth Aviation Ltd ("PAL") submitted a quotation for the construction of the test vehicle for the dynamic firing test. The quotation for the full construction of the test vehicle came to £102,000-odd. The cost explicitly assumed that PAL would use an existing charge liner and initiator assembly, both belonging to SEI, which it already held. However, PAL was also alive to the need for speed. In order to protect a possible testing date in September 2001, it separated out the cost of assembling the warhead. That came to £12,900-odd. Mr Moat sent a copy of the quotation to Ing. Gatti on 4 May. SEI received another copy of PAL's quotation on 11 May.
54. On 15 May Mr Sgarzi set out SEI's position as regards preparations for the dynamic firing test. It was essentially dependent on Raytheon. Mr Sgarzi had spoken to Bob Bell at Raytheon. He was in charge of offset credits. Raytheon's position was that they would fund the cost of the dynamic firing test ($450,000), but only if SEI guaranteed that Raytheon would achieve $20 million in offset credits. Failing that, SEI would have to pay back the $450,000. That was unacceptable to SEI, and Mr Sgarzi therefore told Mr Cardy that:

"For now is a NO GO with PAL."

55. Mr Cardy responded on the following day. Although he did not consider Raytheon's position on offset credits to be a reasonable one, he urged SEI to authorise PAL to assemble the warhead, subject to a limit of £13,000, so that the prospect of a dynamic firing test in 2001 could be kept alive. Mr Cardy said in his oral evidence that Mr Sgarzi's e-mail was a response to his own. But when it was pointed out to him that Mr Sgarzi's e-mail was dated one day earlier than his own, he came up with the suggestion that Mr Sgarzi's e-mail must have been a response to a telephone call. I do not accept the suggestion.
56. On 17 May 2001 Raytheon wrote to Mr Cardy with an instruction to proceed (ITP) to prepare a warhead for a dynamic firing test. It envisaged that a further order (a purchase order) would be placed in due course. Negotiations were to take place with a view to a definitive purchase order limited to $20,000. In the meantime Raytheon instructed SEI to proceed with the "long lead time items", but Raytheon's immediate liability was not to exceed $8,000. Mr Cardy passed on the offer to SEI. Again he urged SEI to issue an instruction to proceed to PAL with a limit of £13,000. SEI accepted the Raytheon offer on 19 May 2001. The day before accepting the Raytheon offer, SEI wrote to PAL giving it authority to proceed to assemble the warhead, but with a limit on cost of £5,000. The sum of £5,000 corresponded to the limit of $8,000 to which Raytheon had committed itself. The text of the letter is of some importance:

"Please accept this as formal ITP placed on PAL – Portsmouth Aviation Ltd with a limit of liability of 5,000 GBP to commence immediately the following activities:

Manufacture Fwd and Aft rings

Assemble the empty warhead

Pack and ship to NAMMO

Fill, assemble, NDT and ship to Pendine

As soon as we receive confirmation from [Raytheon] we will provide a complete Purchase Order for the total amount of 12,912 GBP."

57. SEI sent SEI UK a copy of their letter to PAL. SEI's case is that from then until 1 November 2001, apart from a brief mention at a meeting in September, it heard no more from either SEI (UK) or Raytheon about the dynamic firing test, and that everything that SEI (UK) did towards that end was unauthorised.
58. On 28 May 2001 Mr Moat prepared a quotation for the dynamic firing test in accordance with Raytheon's instruction to proceed. He began by setting out the background in the following terms:

"SEI will be undertaking a dynamic trial of the Lancer 2 warhead system for Raytheon at DERA Pendine UK in September of this year. To do this it will eventually be necessary to incorporate a filled Lancer charge into a track vehicle, containing a mass/CoG representative penetrator.

The funding to manufacture the track vehicle is not yet in place but the critical path in the preparation is to assemble and fill the existing Lancer 2 shaped charge hardware. This is because (i) the existing export licence will soon expire (with the lengthy delays that this will impose) and (ii) the only filling slot available before 2002 is at the end of May 2001. SEI have therefore been asked to provide a fixed price quotation for the assembly, explosive loading and delivery to Pendine of the existing Lancer 2 warhead hardware to support an initial Instruction to Proceed (ITP) for a limit of $20,000.

The charge case and liner exist at Portsmouth Aviation Limited. Part of the process of assembling the charge into the track vehicle requires manufacturing two locating rings that are an integral part of the charge assembly process."

On 4 June 2001 Raytheon sent to SEI (UK)'s fax number the "definitized PO of letter subcontract". This was the confirmation that SEI had been waiting for, but SEI (UK) did not pass it on to SEI. On 8 June 2001 Mr Moat instructed PAL to proceed with the warhead assembly and shipping in accordance with the quotation of 3 May. This instruction was not copied to SEI. A formal purchase order to PAL was issued on 19 June.

59. Mr Cardy explained in his oral evidence that he had had heated discussions with Mr Sgarzi about the funding of the dynamic firing test. He said that Mr Sgarzi had refused to fund the test unless the contract produced a profit of 35 per cent (i.e. a price of over $600,000). It was Mr Sgarzi's refusal to authorise the funding of the test, and in particular his refusal to instruct PAL to assemble the prototype warhead, he said, that led to SEI (UK)'s decision to take the contract from Raytheon in its own name. That is why, he said, the formal purchase order from Raytheon was not passed on to SEI and why SEI (UK) gave the instruction to PAL to proceed with the assembly of the warhead. I reject this evidence, which I found thoroughly unconvincing. First, Mr Cardy did not refer to any "heated discussions" in any of his four witness statements; and no allegation of heated discussions was put to Mr Sgarzi in cross-examination. Second, it is clear from Mr Sgarzi's e-mail of 15 May that his discussions with Raytheon revolved round the sum of $450,000. That only makes sense if SEI were willing to carry out the test for $450,000, as opposed to $600,000. Third, SEI's instruction to PAL made it clear that it would give authority to PAL to assemble the warhead once it received confirmation from Raytheon. That confirmation consisted of the purchase order. Mr Cardy could have had no reason to suppose that SEI had changed its mind in the interim. Fourth, in previous discussions with the US Navy, SEI had evinced a willingness to contribute towards the cost of static firing tests. Mr Cardy also made the self-contradictory claims that, on the one hand, Raytheon would not have placed the contract with SEI and, on the other that Raytheon could not tell the difference between SEI and SEI (UK). Fifth, the purchase order bears the same reference number as the letter of 17 May, and refers to using the expenditure to claim offset credit with the Italian government, so that it is clear that Raytheon intended to contract with SEI. Sixth, SEI (UK) exhibited exactly the same caution about committing itself contractually as SEI had. SEI (UK) did not instruct PAL to incur the full expense of assembling the warhead until Raytheon had sent the purchase order; and, later in the story, it did not give DERA the go-ahead to prepare the Pendine range until the funds from Raytheon were in place. Mr Cardy suggested that the ITP which Raytheon had sent SEI on 17 May committed Raytheon to expenditure of $20,000 and that SEI was at fault in not immediately issuing a clear instruction to PAL to proceed up to that limit. But this is based on a misreading of the ITP, which only committed Raytheon to $8,000 until such time as a formal purchase order was issued. What is clear however, as Mr Cardy accepted, is that by this stage he intended that the contracts should be placed with SEI (UK) and not with SEI. Mr Moat was not told of this intention at the time. He believed that he was acting on behalf of SEI, or, at any rate, that SEI had approved the contractual arrangments.

The Third Teaming Agreement

60. In the mean time SEI and SEI (UK) were preparing to enter into the third Teaming Agreement, together with a consultancy agreement and an agency agreement. Dr Obst e-mailed Mr Cardy a draft of all three agreements on 22 June. A meeting at SEI's offices in Italy had been arranged for 25 June, so time was short. Mr Cardy showed the draft Teaming Agreement to Dr Golesworthy, who made some manuscript suggestions for amendments. Mr Cardy made his own manuscript notes too. Mr Cardy duly travelled to Italy and met Dr Obst on 25 June. At the conclusion of their meeting the Third Teaming Agreement was signed, as were the other two agreements. In its statement of case SEI (UK) alleged that the third Teaming Agreement should be rectified, because Mr Cardy was, in effect, tricked into signing it, in the belief that the engrossed version contained all the amendments he had asked for, and having been given an assurance to that effect by Dr Obst. It was alleged that he discovered that he had been tricked when he read through the agreement on the plane going home, immediately after the conclusion of the meeting on 25 June. However, in his closing submissions Mr Young QC accepted that the claim to rectify could not succeed. As he put it: there was no consensus between SEI and SEI (UK) at the conclusion of the meeting, and therefore the agreement must stand as drawn. However, Mr Cardy's evidence, given after Dr Obst had given his evidence, persisted in the allegation that he had been tricked. I shall deal with that briefly later in this judgment, because it has a bearing on my assessment of Mr Cardy's credibility. I break off the narrative to set out the material terms of the third Teaming Agreement.

The third Teaming Agreement

61. Like its predecessors the third Teaming Agreement sets out the background.

"A) SEI and Impact Sciences Limited (hereinafter called ISL) have worked together to carry out the development and production of a warhead system known as LANCER, for the Hughes Missile Systems Company (HMSC) Airhawk cruise missile, in its configuration for the UK Ministry of Defence Staff Requirement (Air) 1236.

B) ISL business and undertaking have been acquired by SEI-UK on Dec. 18^th 2000 with document CMB/BGL/252089/200533

C) SEI has expertise and resources for the manufacture of a wide range of high quality explosive ordnance.

D) SEI-UK has expertise in the design of a class of warhead systems to defeat various types of targets and has the expertise to asses the effectiveness of such warheads.

E) SEI and SEI-UK wish to join their expertise and resources to develop competitive and cost effective new generation Multiple Warhead Systems (MWS), for use with current or future missiles (such as but not limited to Airhawk, Tomahawk, Centaur and US Hard and Deep Buried Bunker) torpedoes warheads (such as but not limited to Stingray, MU90, Impact …) shaped charges for SEI products."

62. Clause 1 said that the provisions of the second Teaming Agreement were null and void (despite the fact that SEI (UK) had not been a party to it). Clause 2 set out the purpose of the agreement:

"The purpose of the Agreement shall be to form an exclusive relationship between SEI and SEI-UK for the purpose of:

a) Preparing bids, in the name of SEI, to win contracts for the design, development and production of the MWS.

b) Establishing responsibilities and workshare of SEI and SEI-UK in the bid phase and after sub-contracts award."

63. Clause 3 set out the relationship between the parties.

"a) In the bid process, and in any contract gained for the design, development and production of the MWS, SEI will be the Design Authority and lead warhead contractor.

b) SEI-UK will be the exclusive sub-contractor to SEI for the design concept, the performance assessments and the engineering design and testing support to development program, leading to manufacture of the MWS.

c) SEI-UK will not offer its designs, design expertise, assessment capability or development support expertise to any third party in the context of MWS.

d) In case of a UK classified programme or contract in which SEI cannot participate, SEI-UK will be able to participate after written agreement from SEI ."

64. SEI (UK) say that clause 3 c) and clause 3 d) are unreasonable restraints on trade and therefore void. Although SEI (UK)'s statement of case also alleged that they were avoided by section 2 of the Competition Act 1998, this allegation was not pursued. I shall deal with restraint of trade later in this judgment.
65. Clause 4 once again dealt with ownership of intellectual property rights. It began with familiar definitions:

"i. "Background" Intellectual Property Rights (IPR) means all information, including inter alia, Patents, Registered Designs, process expertise (and proprietary rights as identified in the Confidentiality Agreement referred to in Clause 1 above) which SEI or SEI-UK use in the achievement of the contract requirements and

ii. "Foreground" IPR is that which results from the bid preparation or from work on MWS sub-contract by the application of background information to the contract requirements"

66. Clause 4 b) then went on to allocate ownership of IPR as follows:

"Subject to the terms of the contract negotiated with the FINAL CUSTOMERS:

i. Background IPR used in the bidding phase or MWS development phase contract shall be owned by each party performing its respective bid preparation or development work, and

ii. Warhead system foreground IPR arising from MWS bid preparation or development contract shall be owned by SEI who shall be deemed to be the warhead system Design Authority

iii. Warhead subsystem foreground IPR arising from MWS bid preparation or development contract shall be owned as follows:

the forward shaped charge warhead jointly by SEI and SEI-UK who shall be deemed to be the Joint Design Authority, and the rear penetrating, blast warhead (if a SEI design) by SEI who shall be deemed to be the Design Authority.

iv. SEI shall have free user rights of the joint SEI/SEI-UK shaped charge warhead designs emanating from the activities covered by this agreement.

67. Clause 4 c) said that both parties would require the written permission of the other "to exploit the specific MWS studies or components".
68. Clause 5 set out the responsibilities of the parties as follows:

"a) In the workshare relating to MWS sub-contracts, SEI will undertake all the responsibilities of lead warhead contractor and Warhead Design Authority, for the development and production of the MWS warhead including the management aspects thereof.

b) Under sub-contract to SEI, SEI-UK will undertake:

i) The generation of design data for the MWS

ii) Development support

iii) Programme management support

iv) Production support

v) Warhead development trials management support

vi) Warhead performance support

vii) Post development support."

69. Except as to IPR covered by clause 4 the agreement was to run from 25 June 2001 until 31 December 2010. However it could be terminated by mutual agreement or by one party upon material breach by the other party.
70. Clause 10 b) provided:

"Neither party shall collaborate on the same subject (see para 3c)) with any other party while this agreement is in force."

71. Clause 13 provided that each party would bear its own bid and pre-contract support costs.

The Agency Agreement

72. One of the other agreements signed on 25 June was the Agency Agreement. It began by reciting that SEI "intends to entrust SEI-UK Ltd with the task of its dealing agent". Clause 2 provided:

"SEI entrusts the Agent, who accepts, with the task of promoting on an ongoing basis the sale of the products (hereinafter called "Contract Products") quoted in the Attachment 1 of this agreement. The task is entrusted only as far as the Contract Products are concerned, the sale of other products dealt with by SEI are expressly excluded."

73. Clause 5 provided that either party could terminate the agreement on three months written notice.
74. Clause 19 provided:

"The Agent has the right to use SEI marks (name, trademark, logo), for the duration of this Agreement, only if authorized in writing by SEI. The right to use SEI marks ceases when this agreement expires either by default or termination."

75. Clause 22 provided:

"The Agent commits him not to use and not to allow the use of documents or other materials which could contain or suggest the name, the trademark or other SEI marks without previous written approval by SEI.

The Agent commits him/herself to maintain strictly confidential and not to reveal to anybody and for no reason data, news, technical papers, trading, operational, production and managing information or any other information concerning SEI know-how, neither directly nor indirectly, either during or after the termination of this agreement."

76. Clause 23 provided:

"The Agent commits him to avoid business which could be considered in competition with SEI activities, for 6 months from the termination of the agency task (cancellation occurred for any cause and without any importance for both parties) and limited for the exclusivity area as referred to in this agreement.

In particular the Agent commits himself for example and not limiting, not to:

a) carry out his business, with any qualification of employee, manager, agent representative or consultant, for foreign companies competing with SEI;

b) incorporate and/or participate, directly or by means of intermediaries in companies, corporate or even individual business that carry out the above mentioned business;

carry out, personally or by means of other persons, his job, even as for consulting, in business which could interfere with SEI business and/or to the benefit o its competitors;

d) sell directly to the Customer any of the Contract Products.

The Agent is also compelled to abstain from establishing, on his own or on behalf of others, direct or indirect business relationships with current SEI employees."

77. Contract Products were described in Attachment 1. In the USA they included "Multi Warhead Systems (Lancer) for missile application."
78. This agreement was to be governed by Italian law.

The Dynamic Firing Test: continued

79. On 28 June 2001 Raytheon requested "SEI – Società Esplosivi Industriali UK Limited" to provide a fixed price quotation for the dynamic firing test. Clause 3.3 of the accompanying terms and conditions stated that it was Raytheon's intention to use the procurement transaction to fulfil offset obligations with the Government of Italy. On 29 June Mr Moat provided a quotation of $199,500. The quotation was headed "SEI (UK) Ltd" but the body of the text referred to "SEI". On 2 August 2002 Raytheon awarded the contract to "Società Esplosivi Industriali", giving the address of SEI (UK) in Basingstoke. The contract was signed by Mr Cardy on behalf of SEI (UK) Ltd. Mr Cardy did not inform SEI.
80. Dr Castillo said that the technical people at Raytheon had made a decision, on his recommendation, to place contracts with SEI (UK) rather than SEI; and that the management agreed with his recommendation. Thus he supported Mr Cardy's claim that Raytheon would not have placed contracts with SEI. I do not accept this evidence. First, it is contradicted by a "Single/Sole Source Justification" dated 7 June 2001 of which Mr Castillo was the author. The subject of that was the procurement of the design and building of hardware from "Societa Esplosivi Industriali S.P.A.". Dr Castillo said that this was a typographical error. Second, it is contradicted by clause 3.3 of the terms and conditions attached to the request for a quotation. Dr Castillo said that this was an error in the contracts department. Third, it is contradicted by the award itself which was to "Società Esplosivi Industriali". It will be noticed that one difference between the award and the request is that "UK Limited" has been dropped from the name of the addressee. Dr Castillo said that this was another typographical error. Fourth, it is contradicted by the evidence of Mr Mavko and Mr Allen. Although their evidence was not tested by cross-examination, it is, in my view, borne out by the documents. Fifth, although Dr Castillo said that Raytheon were dissatisfied with SEI's performance, there is no hint of complaint in the bundles, and no such allegation was put to SEI's witnesses. I do not accept Dr Castillo's evidence. I add also that Dr Castillo was not aware of any contractual allocation of intellectual property rights as between SEI and SEI (UK). If he had been, his attitude towards the award of contracts might have been different.
81. In the mean time ARC had been chasing the signature of the Teaming Agreement between ARC and SEI. Mr Cardy was copied in on a series of e-mails. On 7 August he e-mailed Mr Sgarzi:

"Fabio, you need to make a decision to sign or not – may be a problem with [Raytheon] if SEI pulls out. Please check if reference to ISL is made within the agreement."

82. Raytheon's concerns over offset credits had still not been allayed. So SEI (UK) began to cast around for other sources of funding for the dynamic firing test. On 13 August 2001 they approached the Director Equipment Capability (Deep Strike) at the MoD. Mr Moat set out the background to the Lancer project. He explained that a test vehicle was under construction and that it was hoped to conduct a firing test in December. He said that the first tranche of funding of £60,000 had covered the manufacture and assembly of the Lancer 2 case and liner component, filling the charge and shipping it to Pendine. In fact that work had been undertaken by PAL for £13,000-odd. There may have been an additional payment for the initiator system but that did not amount to more than £5000-odd. He continued by saying that the second tranche of funding of had enabled the construction of the test vehicle, which, with "associated SEI activities", was £200,000. PAL had actually agreed to construct the test vehicle for a little more than £100,000, and in fact reduced their price on the same day to £94,000-odd. He said that DERA had quoted £177,000 to provide the target and the range. Mr Moat's proposal was that the MoD should provide the funds of £177,000. In fact Raytheon had already provided a contribution of $20,000 towards the hiring of the range. The impression that the letter gave the MoD was, in my judgment, misleading.
83. One consequence of involving the MoD is that the MoD may classify documents or information as secret. This severely hampers any marketing campaign, because potential buyers cannot be supplied with what may be crucial information. On the other hand, involving the MoD may provide much needed funding. Clearly, there is a judgment to be made. But SEI (UK) did not allow SEI to participate in that judgment, because SEI (UK) did not inform SEI that it had approached the MoD for funding.
84. On the same day Mr Cardy instructed PAL to go ahead with the construction of the test vehicle at the reduced price of £94,000-odd. This expenditure was covered by the contract awarded by Raytheon on 2 August. On the following day Mr Moat confirmed to DERA that the test would go ahead. He issued an ITP with a limit on liability of £20,000. On 21 August SEI (UK) submitted an invoice to Raytheon for $39,500 for the provision of the firing slot at Pendine. DERA confirmed its terms and price on 29 August. In fact the price was £188,000-odd (exclusive of VAT). The contract was clearly made with SEI (UK). SEI knew nothing about this.
85. However, in September 2001 Mr Sgarzi and Mr Cardy met. At the end of the meeting they had a short private conversation in Mr Cardy's office. Mr Cardy told Mr Sgarzi that the MoD were going to give financial support to the dynamic firing test. But Mr Cardy did not reveal to Mr Sgarzi the full extent of the preparations for the test that were then in hand. In early October SEI (UK) complained to SEI that invoices were not being met. Mr Cardy sent Mr Sgarzi an e-mail in which he said: "I should have let Lancer die not funded it to keep it alive." Mr Sgarzi replied:

"Regarding letting Lancer live or die, perhaps a decision could have been taken if you had [told] me what was going on, so please don't complain on things we weren't even informed about."

86. On 1 November 2001 Mr Cardy gave Mr Sgarzi more information about the funding of the dynamic firing test. He said:

"the UK MoD have now downgraded the Lancer firing to "Restricted" from "UK/US Eyes B only" following my request to be able to involve Italy. The firing is scheduled for the 5^th December at the UK Pendine range. You can now inform the Italian Air Force and hopefully convince them to attend."

87. He then explained that the total cost of the firing would be £450,000. Raytheon would meet one third, the MoD one third and SEI would be expected to meet the final third. He broke down the SEI contribution, some of which represented actual payments to sub-contractors, and some of which represented SEI (UK)'s in-house costs. Those figures were given as follows, (with my comments in brackets):

i. Warhead loading: £15171 paid to PAL by SEI (UK). (The figure given includes VAT, which would have been recoverable by SEI (UK), and fails to say that the cost had been covered by funds sent by Raytheon, so that there was no net cost to SEI (UK).)

ii. Modified initiation system: £4,883 paid to Pains Wessex by SEI (UK). (The invoice or purchase order has not survived.)

iii. Part range cost: £20,000 paid to DERA by SEI (UK). (This fails to say that Raytheon had already paid SEI (UK) $39,500 to cover the cost of booking the range. At the rate of exchange then in force the value of the payment exceeded £20,000.)

iv. Design of follow through warhead and nose cone and provision of fuze and instrumentation: £35,000 SEI (UK) costs. (The e-mail itself points out that this figure has been inflated by 50 per cent.)

v. Modelling of vehicle/warhead to target: £30,000 SEI (UK) costs. (The e-mail itself points out that this figure has been inflated by 50 per cent.)

vi. Program management, engineering effort, trials documentation, expenses and reporting: £45,000 SEI (UK) costs. (The e-mail itself points out that this figure has been inflated by 50 per cent.)

88. The last three figures amount to £110,000. If they were inflated by 50 per cent, the true cost to SEI (UK) would have been in the order of £70,000. However, Mr Cardy's e-mail said that the true cost to SEI (UK) was £90,000. He asked if SEI would be willing to contribute to that sum. However, the figure of £90,000 seems to me to relate to all six items, which total £40,000. That would suggest that, on the assumption that the £90,000 is itself a correct figure, the true cost to SEI (UK) was of the order of £50,000. Mr Cardy was looking to SEI for a contribution of £45,000 (as his later invoice shows). It is difficult to avoid the conclusion that Mr Cardy was misrepresenting the extent of SEI (UK)'s expenditure in the hope of securing from SEI a financial contribution that would entirely cover SEI (UK)'s costs.
89. On the following day Mr Cardy gave Mr Sgarzi an update on his discussions with the MoD. The update was optimistic about persuading the MoD to include Lancer warheads in some of their Storm Shadow missiles. On 6 November Mr Cardy reported to Mr Sgarzi that a US agency, responsible for all Tomahawk missiles, wanted to send representatives to attend the test firing.
90. On 10 November Mr Cardy sent SEI three invoices, one of which raised an invoice for £45,000 as SEI's contribution to the cost of the dynamic firing test. On 14 November Dr Obst wrote to Mr Cardy rejecting the invoice. He said:

"for the time being, the invoice relating to the contribution for the Lancer Dynamic Firing is rejected, as it was sent without any agreement between SEI and SEI-UK or any Purchase Order.

This rejection does not mean that SEI will not contribute to the costs incurred for the trial, but the amount of the contribution shall be subject to an agreement between the Parties. Please refrain to issue any invoice regarding the subject, until an agreement is reached.

I wish to highlight that, in accordance with the Teaming Agreement signed on 25^th June 2001:

SEI should have been the Lead warhead contractor (clause 3.a and 5.a)

SEI-UK breaches the agreement offering their expertise to third Parties (clause 3.c)

In case of UK classified programs or contracts, SEI-UK should have been authorized in writing by SEI to be the lead (clause 3.d)

Anything that has been generated (drawings, specifications, modelling test results …) during the program shall be given to SEI and SEI shall have free rights on everything that has been done (clause 4.b.ii and 4.b.iv).

I am sure that things were done in good faith and in the interests of SEI, but this does not justify the submission of an invoice, when SEI has not been part of any decision. I suggest that you meet with Fabio in SEI-UK (to avoid any problem in disclosing classified information) to reach an agreement on this matter."

91. On 15 November Mr Moat sent an e-mail to Chuck Norris at ARC to make arrangements for attendance at the test. In the course of his e-mail he inquired about the progress of the Teaming Agreement. Mr Norris replied on 18 November that the Teaming Agreement had been signed and returned to Mr Sgarzi. On 19 November Mr Moat chased payment of SEI (UK)'s invoice. Dr Obst's letter of 14 November must have arrived before 23 November, because on that day Mr Cardy e-mailed Mr Sgarzi to say that before any arrangements were made about attendance at the trial "we need to resolve the points in Olivier's recent letter."
92. On 26 November Mr Norris sent Mr Cardy and Mr Moat a copy of the draft Teaming Agreement between ARC and SEI. The copy had been signed on behalf of ARC.
93. Shortly before the anticipated date of the firing test, SEI (UK) produced a written programme for the day's events. Presentations on the SEI (UK) side were to be made by Mr Cardy and Mr Moat. There was no slot given either to SEI or to ARC. Mr Sgarzi was concerned that SEI had been excluded from the presentations.
94. On 4 December Mr Moat met Ing. Gatti in Wales. Mr Moat says that among the matters they discussed was the fixing of logos to the test vehicle. He says that he and Ing. Gatti agreed that both SEI's logo and SEI (UK)'s logo would be fixed to the test vehicle. Ing. Gatti agrees that he had an amicable discussion with Mr Moat on 4 December. But he says that the question of logos was not discussed, and that he had not brought any of SEI's logos with him from Italy.
95. The test firing took place on 5 December. Mr Sgarzi was due to attend, but he missed his connecting flight, and so did not arrive. Ing. Gatti was there, accompanied by representatives of the Italian Air Force. Mr Cardy gave a briefing before the test took place. Ing. Gatti says that he was embarrassed by the briefing, because SEI's name was not mentioned once. He also says that he did not speak during the briefing. He was concerned that the representatives of the Italian Air Force and Raytheon would ask themselves precisely what SEI's contribution to the Lancer programme was, and he was also concerned that the briefing would leave its audience with a negative impression about the lack of co-operation between SEI and SEI (UK). His cross-examination on this topic (through the interpreter) proceeded as follows:

"Q. 11.20 we come to the SEI Lancer introduction, and do you remember at this stage or maybe at 11.35 at the Lancer 2 briefing. At one of these you were invited to make a short presentation on SEI's position?

A. No, I was never invited to make a presentation.

Q. Also ARC made a short presentation at the same time. Do you remember that?

A. No I do not remember.

Q. Do you remember anything about the 11.20 presentation?

A. I remember that Mr Cardy made a presentation at that time, but during that presentation he never made mention of SEI (Italy) so I was rather – I felt rather bitter at that time, because I had invited these representatives from the Italian Air Force and therefore it looked as though we were simple guests, rather than principal producers.

Q. So far as the firing itself, the Lancer 2 briefing and the firing, so far as that is concerned, it is right that so far as SEI's position, it had not contributed on the technical side, that is correct?

A. Yes, that is right.

Q. Therefore, so far as the briefing was concerned, the Lancer 2 briefing, as the technical input was from SEI (UK), it would only be natural that SEI (UK) was mentioned rather than SEI, at that stage, is that right?

A. No, because in any case, material which was the property of SEI (Italy) had been used for this trial and particularly the liner and the metallic parts of the shaped head."

96. Mr Cardy, Mr Moat and Dr Castillo (the latter attending in the capacity of a consultant to Raytheon) all said that Ing. Gatti himself made a presentation. Mr Cardy also said that in the course of his own presentation he mentioned all the team members including SEI. There is plainly a sharp conflict of evidence on this question. I prefer Ing. Gatti's evidence for the following reasons. First, no representative of SEI appeared as a presenter on the type-written programme for the briefing. Second, I think that Ing. Gatti would have remembered having made a presentation. Not only would such a presentation have been in English, which is not his first language; but also it would have been a presentation that was required to be made at short notice, since the really fluent English speaker at SEI, namely Mr Sgarzi, had been expected to attend but had missed his flight. Third, it was not put to Ing. Gatti in cross-examination that he had made a presentation, as opposed to having been invited to do so. So far as Mr Cardy's own presentation is concerned, what was put to Ing. Gatti was that it was natural for him to speak only of SEI (UK) since SEI (UK) had carried out all the technical work. I reject Mr Cardy's evidence on this point too. Fourth, Mr Moat's written evidence, contained in his witness statement, was far more equivocal about Ing. Gatti's participation in the presentations. So far as Mr Cardy's own presentation is concerned, what was put to Ing. Gatti was that it was natural for him to speak only of SEI (UK) since SEI (UK) had carried out all the technical work. I reject Mr Cardy's evidence on this point too.
97. The test proceeded. SEI's logo did in fact appear on the test vehicle, as did SEI (UK)'s. There was a dispute whether Ing. Gatti had consented in advance to SEI (UK)'s logo appearing on the test vehicle. He said he did not. Mr Moat said that he did. I think it probable that Ing. Gatti knew, before the test firing actually took place, that SEI (UK)'s logo would be on the test vehicle, and did not protest. I do not think it matters whether he knew that the evening before the test or on the morning of the test itself. The test was judged a success. In the evening, following the test, there was a dinner at the hotel. Ing. Gatti, Mr Moat and Mr Cardy, together with the representatives of the Italian Air Force participated. Ing. Gatti paid the bill. Ing. Gatti says that he organised the dinner to cover up the embarrassment that the briefing had caused him, and to reinforce the impression of collaboration between SEI and SEI (UK).
98. Immediately after the test the MoD decided that all outputs should, provisionally, be classified as "UK Secret". However, this was revisited shortly afterwards, and different levels of security classification, ranging from "Unclassified" to "UK Secret" were given to different outputs. Among those which remained classified as "UK Secret" were the target defeat capability (including the impact and exit velocity), the engineering drawings and the trials report.
99. On 6 December 2001 Mr Sgarzi queried a number of changes that had been made to the draft Teaming Agreement with ARC. This provoked a response from Mr Cardy the purport of which was to urge Mr Sgarzi to sign up.
100. On 12 December Mr Sgarzi and Mr Cardy met at SEI (UK)'s premises in Basingstoke. The meeting was wide ranging. Mr Cardy said that he compiled contemporaneous minutes of the meeting, although their accuracy and authenticity is in issue. It is agreed that in the course of the meeting Mr Cardy alleged that as both parties had breached the Teaming Agreement it was "null and void". I deal in more detail with this meeting when I come to consider the evidence about the meeting on 25 June 2001 which culminated in the signing of the third Teaming Agreement.
101. On January 20 2002 Mr Sgarzi e-mailed Mr Cardy chasing "the documentation you promised me on the Lancer dynamic firing." It was needed to show the Italian Ministry of Defence. Mr Cardy replied that Mr Moat would send some pictures.

The Warhead Trade Study

102. On 25 January 2002 Raytheon produced a Statement of Work for a Trade Study of the Lancer warhead system for the tactical Tomahawk missile. The purpose of the study was explained as follows:

"Raytheon Systems Company (RSC) is planning to develop and integrate demonstrated Lancer Multiple Warhead System (MWS) technology into the Tactical Tomahawk cruise missile platform to provide the US Navy with unparalleled capability to defeat both hard and soft targets with one missile variant."

103. The Statement of Work went on to say that the work would be procured from SEI (UK). Under the terms of the Statement of Work SEI (UK) was to perform the following tasks:

i. Develop one or more Lancer MWS designs for the Tactical Tomahawk payload in accordance with the requirements of RSC;

ii. Develop one or more shaped charge (SC) designs for the Tactical Tomahawk payload in accordance with the requirements of RSC;

iii. Support RSC in the development of one or more follow through (FT) penetrator designs for the Tactical Tomahawk payload in accordance with the requirements of RSC;

iv. Provide one or more SC/FT fuzing designs for the Tactical Tomahawk payload in accordance with the requirements of RSC;

v. Provide one or more Target Detection Device designs for the Tactical Tomahawk payload in accordance with the requirements of RSC

vi. Predict the warhead system performance of the Lancer MWS designs produced for the Tactical Tomahawk payload;

vii. Predict the penetration/perforation performance of the Lancer MWS designs against layered soil and concrete target configurations provided by RSC;

viii. Predict the fragmentation performance of the shaped charge designs

ix. Predict the blast performance of the shaped charge design

x. Define the fuze system operation of the Lancer MWS designs for the two operational modes of soft target and hard target attack.

104. SEI (UK) was also to recommend testing procedures and provide a final report summarising the results of the study. On 7 February 2002 Raytheon asked SEI (UK) for a firm fixed price quotation for the study. SEI (UK) quoted on 11 February 2002. The quoted price was $299,999.
105. Although the Statement of Work indicated clearly that the work was to be done by SEI (UK), Raytheon seems to have been in some confusion about the relationship between SEI and SEI (UK). Mr Cardy went to a meeting with Raytheon in Tucson at which he explained the relationship. He relayed his explanation to Mr Sgarzi in an e-mail on 1 February. He said:

"I explained that SEI (UK) Ltd is a wholly UK owned UK MOD list X approved company and no ownership resides with SEI S.p.A or EPC, but we do have a mutually beneficial and compatible business relationship, aimed at working together in certain areas.

The following questions were asked in respect of Lancer:

a. Does SEI (UK) LTD as we understand undertake al the warhead system design – yes

b. Does SEI (UK) LTD undertake as we understand the design of the shaped charge and follow-through warhead – yes

c. Does SEI (UK) LTD as we understand undertake as we understand all the warhead modelling – yes

d. Does SEI (UK) LTD as we understand define the fuzing and target detection solutions – yes

e. Does SEI (UK) LTD own all the modelling codes used with warhead design – YES

f. What is the actual SEI S.p.A. contribution within a LANCER system – Warhead Loading"

106. He went on to say that there was a tension within Raytheon between the engineers and the offset people. The former wanted to contract with the company that actually did the work, and did not want to pay extra for no added technical value. The latter were always looking to exploit opportunities to satisfy offset, but this was of no interest to the engineers. He concluded:

"SEI S.p.A. now [needs] to consider the bigger picture in terms of the SEI S.p.A. and SEI (UK) LTD short and long term relationship, in that no company funding from SEI S.p.A. of SEI (UK) LTD is or has been made (with ISL yes but not SEI UK) with regard to Lancer. Any attempt to restrict SEI (UK) LTD ability to undertake direct contracts with Raytheon for which SEI S.p.A. provide no input will be actively resisted as it constitutes restrictive practice and is in neither [company's] interest – SEI (UK) LTD has to win contracts outside of SEI S.p.A. to continue and I do not expect SEI S.p.A. to have to support SEI UK."

107. By this time Mr Cardy regarded the Teaming Agreement as inapplicable to research contracts. He viewed his discussions with Raytheon as relating to research contracts. In my judgment it is clear that he was not promoting SEI's interests to Raytheon. He did not tell Raytheon that SEI had any interest in the intellectual property rights associated with the shaped charge warhead. In not revealing this he was preferring SEI (UK)'s interests to SEI's. Had Raytheon been aware of the true position, it might well have included SEI in the contractual arrangements.
108. On 7 February 2002 Mr George Mavko of Raytheon e-mailed Mr Cardy, again expressing doubt about the precise status of SEI (UK). Mr Cardy replied that SEI (UK) was independent of SEI and gave details of the company registration.
109. On 12 February 2002 Mr Moat sent Mr Sgarzi a version of the trials report for the Lancer dynamic firing test. However, the report was a "sanitised" version. SEI were not shown the full version until I ordered it to be disclosed on the third day of the trial.

Termination of the Third Teaming Agreement

110. On 5 March 2002 Mr Cardy sent a fax to SEI purporting to terminate the Teaming Agreement. He said:

"Please accept this letter as notification of formal termination of the above Teaming Agreement due to material breach of the terms defined by both parties in line with Para. 7 (ii). The material breach by SEI (UK) Ltd identified by SEI S.p.A. being defined in the letter dated 14^th November 2001. The material breach by SEI S.p.A. identified by SEI (UK) Ltd being minuted at meeting (Cardy/Sgarzi) on the 12^th December – Para 10 (c), Agreement negotiated with ARC.

Neither party has remedied the breach within the 30 day period identified and as such the agreement became null and void as of the 12^th January 2002.

The agreement and termination has been referred to the [company's] Solicitors who have identified that the Agreement as defined is in fact in direct contravention with UK Law, in that it contravenes the Restricted Trade Practices Acts of 1976, 1977 and 1998, as well as the 1986 EC Treaty of Rome."

111. SEI responded to this letter on 28 March. Dr Obst accepted that he had identified breaches by SEI (UK) but said that he had not started the 30 period running. He denied that SEI was in breach of the agreement, and pointed out that no agreement between SEI and ARC had actually been concluded. He concluded by saying that "we do not accept your notification of the termination of the Agreement".
112. Termination of the Teaming Agreement by SEI (UK) on account of its own breaches of the agreement is plainly impermissible. So far as the allegation of breach of the agreement by SEI is concerned, it is unsustainable. Quite apart from the fact that SEI had not entered into any teaming agreement with ARC, it was envisaged from the very start that ARC would be part of Team Lancer; and, as the narrative shows, not only did Mr Cardy know that, but he also persistently encouraged SEI to sign up. Even after Mr Cardy had received a copy of the agreement as signed by ARC he raised no complaint about its detailed terms, until, at the earliest, 12 December 2001. His explanation for his failure to express any concerns over its terms, in particular in his e-mail of 6 December 2001, was one which I found incredible.
113. On 5 April 2002 Mr Cardy gave notice terminating the agency agreement on 5 July 2002 and the support services and consultancy agreement on 5 October 2002. SEI accepts that these two agreements have been validly terminated.
114. On 22 April 2002 Withers LLP, SEI's solicitors, wrote to SEI (UK) rejecting the termination of the Teaming Agreement and asserting that it was still valid and binding between the parties. However, both parties agree that the Teaming Agreement is now at an end. The precise legal route to this conclusion is a little obscure; but if for no other reason it has been discharged by agreement.

The Raytheon Trade Study

115. On 23 August 2002 SEI (UK) (by now renamed Ordnance Technologies (UK) Ltd) produced the Trade Study for which Raytheon had produced the Statement of Work in January 2002. Only a few pages of this study were disclosed until I ordered disclosure on the third day of the trial. The study begins:

"1.1 Following the successful dynamic firing test of the Ordnance Technologies (UK) Limited (OTL) multi-warhead system (MWS) in December 2001, Raytheon placed a trade study contract on OTL to identify the performance potential of a MWS in Tactical Tomahawk (TT) together with a development programme structure and costs. The outline of the study was defined in a statement of work (SOW) agreed by Raytheon and OTL. …

1.3 Subsequent to the SOW agreement, Tactical Tomahawk has become a multi-mission missile (MMM or M3), with the objective of identifying a single missile with the capability of defeating both hard and soft targets."

116. The details of the Trade Study referred at various points to the outcome of the Pendine test firings. These included the depth of the predicted crater made by the shaped charge jet; the reduction in length of the penetrator bomb, and the success of the aluminium liner. On the subject of the need for test firings, the Trade Study said:

"Because of the firings that have been undertaken in the last three years the need for near-repeats of these were considered unnecessary in terms of a demonstration activity. These have been incorporated into the system development testing."

117. In his witness statement Mr Allen of Raytheon described the genesis of the Study as follows:

"The purpose of the warhead trade study which was undertaken at the beginning of 2002 was to take the results of the Pendine test and from there to evolve the design for further marketing purposes. Had the Pendine test not taken place or not been successful, it would have been less likely that such a trade study would have been commissioned."

118. This seems to me to tally with the way in which the introduction to the report is framed. Although Mr Allen's evidence was not tested by cross-examination, I accept it. It is clear, therefore, that the Warhead trade Study flowed out of the success of the dynamic firing test of the Lancer 2 warhead. And, as I have said, if Raytheon had been aware of SEI's entitlement to intellectual property rights, it might have included SEI in the contractual arrangements for the study.

Negotiation of the Third Teaming Agreement

119. I now backtrack to deal with the circumstances in which the third Teaming Agreement came to be signed. Although the claim to rectify the agreement has been abandoned, it seems to me that whether the terms of the agreement were truly agreed is relevant to Mr Cardy's credibility, and may also have some bearing on the question whether they are an unreasonable restraint of trade. As Lord Reid explained in Esso Petroleum Co Ltd v. Harpers Garage (Stourport) Ltd [1968] AC 269 at 300:

"Where two experienced traders are bargaining on equal terms and one has agreed to a restraint for reasons which seem good to him the court is in grave danger of stultifying itself if it says that it knows that trader's interest better than he does himself. But there may well be cases where, although the party to be restrained has deliberately accepted the main terms of the contract, he has been at a disadvantage as regards other terms: for example where a set of conditions has been incorporated which has not been the subject of negotiation - there the court may have greater freedom to hold them unreasonable."

120. In A Schroeder Music Publishing Co Ltd v. Macaulay [1974] 1 WLR 1308 at 1314 Lord Reid again emphasised the importance of the question whether the clauses under attack had been the subject of negotiation.
121. The draft agreement was prepared by the commercial office within SEI. It was sent to Mr Cardy shortly before the projected meeting on 25 June 2001. Clause 3 c) of the draft read:

"SEI-UK will not offer its designs, design expertise assessment capability or development support expertise to any third party in the context of MWS".

122. Mr Cardy added in manuscript:

"except for Research Contracts with DSTL & New DERA or unless agreed in writing by SEI for contracts where SEI cannot or do not wish to participate."

123. At this stage there was no clause 3 d) in Mr Cardy's draft. Mr Cardy's manuscript amendment to clause 3 c) did not survive into the signed agreement. But instead the signed agreement contained clause 3 d). That said:

"In case of a UK classified programme or contract in which SEI cannot participate, SEI-UK will be able to participate after written agreement from SEI".

124. Final discussions about the terms of the agreement were held between Dr Obst and Mr Cardy. At the conclusion of the discussions, both men signed the agreement and also initialled each page of it. The agreement takes up about three and a half pages.
125. Dr Obst said that the agreement was in the form that he intended to sign. He said that clause 3 d) took the form it did because of a compromise between him and Mr Cardy. Dr Obst's concern was that SEI (UK) might use the alleged secrecy of a programme to keep work away from SEI, and that it was important for him to achieve transparency so that SEI knew, as far as it could, what was going on. Thus, he said, they agreed that SEI (UK) could undertake work on UK classified programmes, but only with SEI's consent. That consensus was reflected in the final form of the agreement. In his first witness statement, Dr Obst said that he did not recall having assured Mr Cardy that his amendments had been incorporated. This evidence was not challenged in cross-examination, and I accept it. It was not suggested to Dr Obst that he made a mistake in signing the document in the form in which it was signed. Nor was it suggested to him that he knew or suspected that Mr Cardy was mistaken, or that he tricked Mr Cardy into signing.
126. In his oral evidence Mr Cardy backed off, to some extent, from the allegation that Dr Obst was personally guilty of trickery. He suggested that the fault may have lain with SEI's contract department. He said that he had seen an annotated draft with comments by Dr Obst in Italian, which left Dr Obst's office and went to the contracts department. This was not in his witness statements, was not put to Dr Obst; and the annotated draft was neither disclosed on disclosure, nor formed the subject of an application for specific disclosure. If Mr Cardy's evidence about an annotated draft is to be believed, these omissions are inexplicable.
127. Despite the fact that Mr Cardy says that he was tricked into signing the Teaming Agreement, there was no written complaint made to SEI until after these proceedings had been started. Mr Cardy said that he telephoned Mr Sgarzi to protest on 26 June 2001; and that he raised the matter again at the meeting between the two men on 12 December 2001. In his second witness statement Mr Sgarzi said that there had been no such telephone call. This was not challenged in cross-examination, and I accept his evidence.
128. The minutes of the December meeting on the topic of the Teaming Agreement read as follows:

"SC stated that as both parties had breached the Teaming Agreement and that SEIUK considered that it was now null and void. FS expressed his unhappiness with the position being taken by SEIUK. It was further pointed out by SC that when the agreement was being amended in SEI Ghedi based on the marked up copy (attached to minutes) that SEII intentionally modified the final agreement than that agreed by SC but assured SC on presenting the final agreement (with the car to take SC to the airport already having been waiting 15 minutes and a danger of missing the flight) that it was exactly has SC requested – SC only noticed the differences when reading the agreement on the flight back and stated that it was considered to have been an intentional deception to weaken the position of SEIUK within the agreement. Two particular issues related to:

a. the requirement that SEIUK required SEII agreement to bid and accept research agreements – this is and always has been unacceptable.

b. that the agreement should only cover the specific Lancer design for which SEII have funded some task and other SEII related warheads as agreed with SEIUK – it should not cover generically Multi-Warhead Systems or other types of SEIUK designed warheads, as this was too far reaching and restrictive.

FS stated that he was sure it was a misunderstanding or language translation issue, and that all SEII wanted was to have visibility on all the contracts SEIUK would be working on. SC stated in a positive manner that SEII did not own or control SEIUK and had no right to expect such visibility – it could be considered contrary to the official Secrets Act. FS undertook to resolve the issue with O OBST. SC stated that as also SEII had and were attempting to sign a conflicting agreement with ARC and was misleading ARC by formally stating that they owned SEIUK within the agreement (copy attached), then they were in breach of the Warhead Agreement and SEIUK therefore considered it null and void. FS reluctantly accepted the situation regarding ARC."

129. In his second witness statement Mr Sgarzi said that there was no discussion of the alleged differences between the signed agreement and what had been agreed. He said that Mr Cardy did not allege that there had been an intentional deception. He adhered to this in cross-examination. He said in his oral evidence that Mr Cardy did not complain that the draft agreement with ARC inferentially stated that SEI owned SEI (UK). He also said that there were other important matters that had been discussed between them which were not recorded in the minutes. This was not challenged in cross-examination. Mr Cardy, however, said that the minutes were an accurate record of the discussion, and that he did allege that there had been an intentional deception on the part of SEI. He, too, adhered to his evidence in cross-examination. He also said that Mr Sgarzi told him that all the problems could be resolved if he (Mr Cardy) recommenced talks on selling SEI (UK) to SEI. This suggestion was not made in Mr Cardy's witness statement and was not put to Mr Sgarzi in cross-examination.
130. In his witness statement Mr Cardy originally said that copies of the minutes were faxed to SEI on 18 December. Even after Mr Sgarzi denied having received them, Mr Cardy persisted in saying that they had been sent. He produced a fax transmission sheet showing that a three page document had been faxed to SEI on 18 December. However, further investigation by SEI showed that although there was a fax of the length of the minutes transmitted on 18 December, it was in fact a completely different document. Moreover, the minutes were supposed to have attachments to them, so that any fax transmission of them would have been more than three pages. Mr Cardy corrected his witness statement before verifying it to accept that the minutes may not have been sent to SEI after all. I find that they were not. In my view, as he conceded in cross-examination, Mr Cardy changed his evidence because he was "forced to".
131. I accept Mr Sgarzi's evidence. First, I find the absence of any prior written protest by Mr Cardy extraordinary. His explanation for his silence, namely that he did not wish to jeopardise his relationship with SEI, is incredible. Second, if Mr Cardy had alleged intentional deception on the part of SEI, it is incredible that SEI did not respond to the accusation. I reject both Mr Cardy's account of the signing on 25 June 2001 and his account of the meeting on 12 December.
132. I mention by way of footnote that clause 10 of the Support Agreement, which was also signed on 25 June 2001, contains, at the end of clause 10, a provision in identical terms to clause 3 d) of the third Teaming Agreement. Mr Cardy made no complaint about the terms of the Support Agreement either at the time, or during the progress of this case. On the face of it, his absence of complaint is inconsistent with his evidence about the signing of the third Teaming Agreement. However, since this clause was not put to Mr Cardy, and he did not comment on it, I place very little weight on it, and it does not affect the conclusion to which I would have come anyway.
133. I find that clause 3 c) and clause 3 d) of the third Teaming Agreement were negotiated and agreed between Dr Obst and Mr Cardy on 25 June 2001. They represented an agreed compromise between the competing aspirations of the two parties.

Competition issues

134. SEI (UK) says that the provisions of the agreements alleged to have been broken by it are unlawful and unreasonable restraints of trade. Hence they are void at common law. The provisions of the third Teaming Agreement to which this plea is directed are clause 3 b) (SEI (UK) to be the exclusive sub-contractor to SEI); clause 3 c) (SEI (UK) not to offer its designs etc. to third parties in the context of MWS); clause 3 d) (SEI (UK) to participate in classified programs only with the consent of SEI); clause 4 c) (consent of both parties required for exploitation of specific MWS studies) and clause 10 b) (No collaboration with third parties). In his closing submissions Mr Young QC focused his attack on clause 3 c) and 3 d).
135. As I have said, the allegation that these clauses were also invalidated by section 2 of the Competition Act 1998 was abandoned. It was not argued that the common law doctrine of restraint of trade had been affected either by Articles 81 and 82 of the EC Treaty or the Competition Act 1988. I shall assume that the common law has survived intact.
136. Where a contract is attacked as being in restraint of trade, the court's first task is to determine the extent of the restraint. Only when that has been done can the court form a view about whether the restraint is valid. As Lindley LJ said in Mills v. Dunham [1893] 1 Ch 577 at 587: "You are to construe the contract, and then see whether it is legal."

Interpretation of the third Teaming Agreement

137. The process of interpretation is the ascertainment of the meaning that the contract would convey to a reasonable reader with all the background knowledge of the parties.
138. I set out clause 3 c) and clause 3 d) again for ease of reference:

"c) SEI-UK will not offer its designs, design expertise, assessment capability or development support expertise to any third party in the context of MWS.

d) In case of a UK classified programme or contract in which SEI cannot participate, SEI-UK will be able to participate after written agreement from SEI."

139. It is common ground that clause 3 c) prevents SEI (UK) from offering its specialist mathematical modelling skills to others "in the context of MWS". It is also common ground that "MWS" means multi-warheads carried by missiles, and that a missile is a self-propelled projectile which is guided through the air in some way. Thus clause 3 c) would not have prevented SEI (UK) from offering to model a multi-warhead for, say, a torpedo. But it is also common ground that, at the date of the agreement, there was no immediate prospect of anyone being interested in actually developing a multi-warhead for torpedoes. Clause 3 c) must be read together with clause 3 d). It was common ground that what was covered by clause 3 d) fell into two categories:

i. UK classified programmes in which SEI could not participate and

ii. Contracts in which SEI could not participate (for any reason).

In either of these cases, SEI (UK) could only participate with SEI's consent. This is not, to my mind, the natural grammatical reading of the clause. However, I think that, having regard to the commercial purpose of the agreement, and to the modern principle that a court of construction may conclude that the language of a contract can go wrong, it is a permissible construction. The interpolation of the indefinite article before the word "contract" and a little adjustment to the layout makes the meaning clearer. Thus:

"In case of

a UK classified programme or

a contract

in which SEI cannot participate, SEI-UK will be able to participate after written agreement from SEI"

140. Mr Howe QC submitted, and I did not understand Mr Young QC strenuously to dispute, that SEI would not be entitled to withhold consent unreasonably. Where one party to a contract is dependent on the consent of another party to it, the court will often imply a term to the effect that consent may not be unreasonably withheld. In Abu Dhabi National Tanker Co v. Product Star Shipping Ltd (No. 2) [1993] 1 Lloyd's Rep 397 Leggatt LJ said:

"Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably."

141. The Court of Appeal took a similar (though not identical) approach in Gan Insurance Co Ltd v. Tai Ping Insurance Co Ltd (No 2) [2002] 2 All E.R. (Comm) 299 and Paragon Finance plc v. Nash [2001] 1 WLR 685. In my judgment a term to similar effect must be implied into clause 3 d), particularly since the agreement required the parties to work as a team in a relationship of trust and co-operation.
142. Thus the overall scheme of the restrictions is as follows. First, SEI (UK) may not offer their skills in MWS to a third party. They must bring the offer of work to SEI. If SEI chooses to undertake the work, the contractual arrangements, by which SEI will be the contractor, and SEI (UK) will be the sub-contractor, will apply. If the work is work in which SEI cannot participate, then SEI (UK) may carry out the work under its own contract with the third party, with SEI's consent, such consent not to be unreasonably withheld. The gap in the scheme is a case in which SEI can participate in the work, but chooses not to. There is no express obligation placed on SEI to undertake whatever work relating to MWS SEI (UK) brings to its attention, nor is there any obligation placed on SEI to seek out such work. I do not consider that it would be permissible to imply terms to that effect.

Reasonableness of the restraint

143. It is common ground that clause 3 c) and 3 d), taken together, amount to a restraint on trade. It is also common ground that the burden lies on SEI to justify the restraint as being reasonable. In Manchester Sheffield and Lincolnshire Railway Co v. Brown (1888) 8 App. Cas. 703 Lord Bramwell said:

"For here is a contract made by a fishmonger and a carrier of fish who know their business, and whether it is just and reasonable is to be settled by me who am neither fishmonger nor carrier, nor with any knowledge of their business."

Nevertheless, that is the task I must perform.

144. Mr Young's complaints can, I think, be summarised as follows:

i. SEI (UK) are forbidden to offer their skills in MWS to any third party. This was an important part of SEI (UK)'s business;

ii. But SEI has no obligation to provide work for SEI (UK) in that field;

iii. The restriction lasts for 9 ½ years and, unless SEI commits a breach of contract which remains unremedied for 30 days, SEI (UK) cannot terminate the contract;

iv. In particular SEI (UK) cannot, without SEI's consent, undertake modelling for UK MoD research projects, which were the subject of specific permission in the second Teaming Agreement. Since such projects may be, by their very nature, classified as secret or top secret, clause 3 d) is unworkable, as SEI (UK) may not be able to reveal anything about the project in order to obtain the necessary consent. Thus Dr Obst's desire to achieve "transparency" is in practice unattainable. In addition, the overall purpose of the agreement was to enable SEI ultimately to manufacture weapons or components of weapons, and MoD research contracts may not lead to a design product that SEI is capable of manufacturing.

145. The lack of a reciprocal obligation may be an important feature in deciding whether a restraint on trade is reasonable. This was the case in A Schroeder Music Publishing Co Ltd v. Macaulay [1974] 1 WLR 1308. The plaintiff was a young and unknown songwriter who entered into a standard form of contract with a music publisher. The contract was to last for 5 years. During the currency of the contract the songwriter was to render services exclusively to the publisher, and assigned to the publisher all copyright in every musical composition and lyric. He was to be paid by royalties on the sales receipts of published songs. Although the publisher could determine the agreement, the songwriter could not. The House of Lords held that the agreement was an unreasonable restraint of trade, and therefore void. I refer to two passages in the speech of Lord Reid (which I quote in the reverse order to that in which they appear in the speech):

"Any contract by which a person engages to give his exclusive services to another for a period necessarily involves extensive restriction during that period of the common law right to exercise any lawful activity he chooses in such manner as he thinks best. Normally the doctrine of restraint of trade has no application to such restrictions: they require no justification. But if contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be justified before they can be enforced." (page 1314)

"The public interest requires in the interests both of the public and of the individual that everyone should be free so far as practicable to earn a livelihood and to give to the public the fruits of his particular abilities. The main question to be considered is whether and how far the operation of the terms of this agreement is likely to conflict with this objective. The respondent is bound to assign to the appellants during a long period the fruits of his musical talent. But what are the appellants bound to do with those fruits? Under the contract nothing. If they do use the songs which the respondent composes they must pay in terms of the contract. But they need not do so. As has been said they may put them in a drawer and leave them there.

No doubt the expectation was that if the songs were of value they would be published to the advantage of both parties. But if for any reason the appellants chose not to publish them the respondent would get no remuneration and he could not do anything. Inevitably the respondent must take the risk of misjudgment of the merits of his work by the appellants. But that is not the only reason which might cause the appellants not to publish. There is no evidence about this so we must do the best we can with common knowledge. It does not seem fanciful and it was not argued that it is fanciful to suppose that purely commercial consideration might cause a publisher to refrain from publishing and promoting promising material. He might think it likely to be more profitable to promote work by other composers with whom he had agreements and unwise or too expensive to try to publish and popularise the respondent's work in addition. And there is always the possibility that less legitimate reasons might influence a decision not to publish the respondent's work.

It was argued that there must be read into this agreement an obligation on the publisher to act in good faith. I take that to mean that he would be in breach of contract if by reason of some oblique or malicious motive he refrained from publishing work which he would otherwise have published. I very much doubt this but even if it were so it would make little difference. Such a case would seldom occur and then would be difficult to prove.

I agree with the appellants' argument to this extent. I do not think that a publisher could reasonably be expected to enter into any positive commitment to publish future work by an unknown composer. Possibly there might be some general undertaking to use his best endeavours to promote the composer's work. But that would probably have to be in such general terms as to be of little use to the composer.

But if no satisfactory positive undertaking by the publisher can be devised, it appears to me to be an unreasonable restraint to tie the composer for this period of years so that his work will be sterilised and he can earn nothing from his abilities as a composer if the publisher chooses not to publish. If there had been in clause 9 any provision entitling the composer to terminate the agreement in such an event the case might have had a very different appearance. But as the agreement stands not only is the composer tied but he cannot recover the copyright of work which the publisher refuses to publish." (page 1313)

146. My conclusions on this issue are as follows:

i. There is no doubt that a substantial part of SEI (UK)'s work was in the field of MWS at the date of the third Teaming Agreement. Because of the looseness of the terminology, it is not possible to be precise about the percentage. I think that Mr Moat gave the most reliable estimate, which was 55% of ISL's work in 2000. I do not know what proportion of that work consisted of work on the Lancer project itself, as respects which the contract arrangements seemed to be working perfectly satisfactorily. Dr. Golesworthy regarded the Teaming Agreements as beneficial for ISL's point of view. By the time of the third Teaming Agreement, ISL's business had been transferred to SEI (UK), which had other revenue streams as well. So on any view, MWS must have represented a significantly lower proportion of SEI (UK)'s work. Mr Cardy prepared a forecast of sales as at January 2001. That showed total sales of £599,000, of which £68,000 was attributed to ISL research and £80,000 on Lancer projects. Some £450,000 was attributed to contract support and commission on sales of other SEI products. Unlike Mr Macaulay, who was tied to Schroeder for all his output, SEI (UK) had freedom for at least half theirs, and probably much more.

ii. It is true that SEI had no obligation to find work in the field of MWS. But this has to be seen in context. SEI was keen to enter the field of MWS. It had already expended time effort and money in promoting Lancer 1. If it wanted to undertake any work relating to MWS, it was bound to use SEI (UK) as its designer. Unlike the position as between Mr Macaulay and Schroeder, SEI was not free to promote competitors of SEI (UK). In addition, under the terms of the Agency Agreement, SEI (UK) itself had an obligation to promote SEI's services in the MWS field in the UK and the USA. In my judgment, it would be fanciful to suggest that SEI would let SEI (UK) starve.

iii. A period of 9 ½ years is not a long one in the context of a defence project using and developing cutting edge technology. The second Teaming Agreement, which Dr Golesworthy of ISL thought was mutually beneficial, itself had a projected duration of 8 years. Mr Cardy himself said that the research phase of such a project could take up to 15 years, and the development phase could take 7. Even the bid phase could take several years. A decade in the pop music business, by contrast, is a very long time indeed.

iv. If a research contract came up via the MoD, there were two possibilities. Either it would be one in which SEI were able to participate, in which case the contractual machinery would operate. SEI would be the lead contractor and SEI (UK) would be the sub-contractor. Alternatively, it would be one in which SEI could not participate, in which case SEI could not unreasonably withhold its consent to SEI (UK)'s participation. In any event, I think that the practical problems about revealing information are overstated. There is one example in the papers (relating to Paveway III with which I deal below) where the MoD apparently insisted on work being carried out by a UK contractor, but raised no protest about the nature of the problem and the scope of the work being communicated (at least in general terms) to SEI.

147. I add to this four further considerations. First, the impetus for a novation of the second Teaming Agreement (which contained all the restrictions on MWS with the exception of the MoD research contracts) came from Mr Cardy himself. Second, the clauses under attack were the product of negotiations between Mr Cardy and Dr Obst. Third, Mr Cardy was not an ingénu. He was a man with wide experience in the defence industry, and knew the commercial potential of "Lancer technology". He himself said that the agreement was intended to be "a balanced agreement, mutually beneficial to both sides". Fourth, the third Teaming Agreement bears a close resemblance to the first and second agreements. While they may not have achieved the status of standard industry forms, they were acceptable to ISL, who may also be taken to be commercially aware.
148. I conclude, for these reasons, that clause 3 c) and 3 d) are not void as unreasonable restraints on trade.

Implied terms

149. SEI claims that it is an implied term of the third Teaming Agreement that SEI (UK) must provide SEI with copies of materials embodying "Foreground IPR". Foreground IPR is, according to the agreement, owned either by SEI alone or by SEI and SEI (UK) jointly. Those elements that are owned by SEI alone are "warhead system" foreground IPR and the rear penetrating warhead, if designed by SEI. The element that is jointly owned is the forward shaped charge warhead. SEI also has free user rights of the jointly owned shaped charge warhead designs.
150. In essence, SEI says that unless it can have copies of the materials embodying foreground IPR its rights of ownership and free use are useless. How can it use a design that it cannot see? In my judgment this submission is unanswerable, and Mr Young did not seriously contest it. The principal area of dispute was the scope of the intellectual property rights to which SEI was entitled under the Teaming Agreement. To that I now turn.

Design right

151. Section 213 of the Copyright Designs and Patents Act 1988 provides:

"(1) Design right is a property right which subsists in accordance with this Part in an original design.

(2) In this Part "design" means the design of any aspect of the shape or configuration (whether internal or external) of the whole or part of an article.

(3) Design right does not subsist in—

(a) a method or principle of construction,

(b) features of shape or configuration of an article which—

(i) enable the article to be connected to, or placed in, around or against, another article so that either article may perform its function, or

(ii) are dependent upon the appearance of another article of which the article is intended by the designer to form an integral part, or

(c) surface decoration.

(4) A design is not "original" for the purposes of this Part if it is commonplace in the design field in question at the time of its creation.

(5) Design right subsists in a design only if the design qualifies for design right protection by reference to—

(a) the designer or the person by whom the design was commissioned or the designer employed (see sections 218 and 219), or

(b) the person by whom and country in which articles made to the design were first marketed (see section 220),

or in accordance with any Order under section 221 (power to make further provision with respect to qualification).

(5A) …

(6) Design right does not subsist unless and until the design has been recorded in a design document or an article has been made to the design.

(7) Design right does not subsist in a design which was so recorded, or to which an article was made, before the commencement of this Part."

152. Although section 213 speaks of "an article" it is clear that the article does not have to exist in reality. A design which could be turned into an article (once recorded in a design document) is protected by design right, even if it is never made by the designer and even if the designer has no intention of making it.
153. Section 226 provides:

"(1) The owner of design right in a design has the exclusive right to reproduce the design for commercial purposes—

(a) by making articles to that design, or

(b) by making a design document recording the design for the purpose of enabling such articles to be made.

(2) Reproduction of a design by making articles to the design means copying the design so as to produce articles exactly or substantially to that design, and references in this Part to making articles to a design shall be construed accordingly.

(3) Design right is infringed by a person who without the licence of the design right owner does, or authorises another to do, anything which by virtue of this section is the exclusive right of the design right owner.

(4) For the purposes of this section reproduction may be direct or indirect, and it is immaterial whether any intervening acts themselves infringe the design right."

154. Section 227 (1) provides:

"(1) Design right is infringed by a person who, without the licence of the design right owner—

(a) imports into the United Kingdom for commercial purposes, or

(b) has in his possession for commercial purposes, or

(c) sells, lets for hire, or offers or exposes for sale or hire, in the course of a business,

an article which is, and which he knows or has reason to believe is, an infringing article."

155. Section 258 (2) of the Act provides:

"Where design right (or any aspect of design right) is owned by more than one person jointly, references in this Part to the design right owner are to all the owners, so that, in particular, any requirement of the licence of the design right owner requires the licence of all of them."

The allocation of intellectual property rights under the third Teaming Agreement

156. For ease of reference I set out clause 4 again.

"4. Design Rights

a) By way of definition:

i. "Background" Intellectual Property Rights (IPR) means all information, including inter alia, Patents, Registered Designs, process expertise (and proprietary rights as identified in the Confidentiality Agreement referred to in Clause 1 above) which SEI or SEI-UK use in the achievement of the contract requirements and

ii. "Foreground" IPR is that which results from the bid preparation or from work on MWS sub-contract by the application of background information to the contract requirements"

"b) Subject to the terms of the contract negotiated with the FINAL CUSTOMERS:

i. Background IPR used in the bidding phase or MWS development phase contract shall be owned by each party performing its respective bid preparation or development work, and

ii. Warhead system foreground IPR arising from MWS bid preparation or development contract shall be owned by SEI who shall be deemed to be the warhead system Design Authority

iii. Warhead subsystem foreground IPR arising from MWS bid preparation or development contract shall be owned as follows:

the forward shaped charge warhead jointly by SEI and SEI-UK who shall be deemed to be the Joint Design Authority, and the rear penetrating, blast warhead (if a SEI design) by SEI who shall be deemed to be the Design Authority.

iv. SEI shall have free user rights of the joint SEI/SEI-UK shaped charge warhead designs emanating from the activities covered by this agreement

c) Both parties shall require the written permission of the other to exploit the specific MWS studies or components."

157. Mr Young stressed what he said was the commercial purpose of the Teaming Agreement. SEI was a manufacturer of high quality ordnance, as the agreement itself recited. By contrast SEI (UK)'s expertise lay in the design and assessment of warheads. The purpose of the agreement was that stated in clause 2 a), namely bids, in the name of SEI, to win contracts for the design, development and production of the MWS. But he said that SEI's practical and technical responsibility arose only at the stage when something had to be manufactured. This was reinforced by the deeming provisions of clause 4 which deemed SEI to be the design authority or joint design authority. A design authority is a concept which arises under a defence contract for the development and production of a weapon. Until a contract has been placed it is meaningless to speak of a design authority. Thus what SEI was entitled to by way of information was that which was necessary to enable it to perform its contemplated tasks. That was limited to manufacturing drawings, and final reports on the various practical tests. Moreover, he said, clause 4 is headed "Design Rights" and does not mention copyright at all. Accordingly, what was contemplated by clause 4 was that SEI would be able to operate as design authority once a contract had been placed based on a design generated by SEI (UK). Variations examined and discarded by SEI (UK) in the course of the mathematical modelling not only do not relate to the subject matter of the bid; they are of no practical utility to anyone else, and consequently SEI have no right to see them. The free user rights allocated to SEI are limited to free use of a specific design generated by SEI (UK) for the purposes of a specific bid. They do not allow SEI to exploit a design for any application outside the specific bid for which the design has been generated.
158. Mr Howe submitted that the Teaming Agreement was intended to operate throughout the world. It was made between a UK company and an Italian corporation, and it was contemplated that at least one, and probably two, American corporations would ultimately be members of the team in which SEI would be contractor and SEI (UK) sub-contractor. Thus the parties must have contemplated that intellectual property rights might have to be enforced anywhere in the world. It was wrong, therefore, to submit, as Mr Young did, that the intellectual property rights were limited to design right in the sense in which that phrase is used in English law. He took me on a tour d'horizon of the systems of protection of industrial design both in the EC and elsewhere, to demonstrate the diversity of different forms of protection. Many such systems depend wholly or partly on the law of copyright to protect industrial designs. Even in domestic law there is no bright line distinction between copyright and design right. A design document may be protected by both, in different circumstances.
159. The phrase "intellectual property rights" (IPR) is defined by the agreement itself. That must be the starting point for determining what the parties have agreed. The definition is a wide one. It begins with "all information". It is difficult to conceive of a wider definition. It also encompasses registered designs and patents. It does not mention unregistered designs, which are the subject of design right in domestic law, at all. So if, as is accepted, design right falls within the scope of the definition, it must be because it falls within "all information". But why stop at design right? In my judgment Mr Howe is correct in submitting that materials protected by copyright also fall within the scope of the definition. This conclusion is, in my judgment, reinforced by the multi-national considerations referred to above.
160. Mr Howe also submitted that Mr Young took too narrow a view of what a design document was. It was not limited to production drawings. A design, he said, evolved. It might begin as a sketched out concept, leaving much detail to be worked up later. Each stage of an evolving design, provided that it was recorded in a design document, was entitled to the protection of design right. He illustrated this by reference to A Fulton Co Ltd v. Totes Isotoner (UK) Ltd [2003] EWCA Civ 1514. In that case the Court of Appeal held that there had been infringement of design right. The design in question took the form of a sketch, with approximate dimensions, of a case for a folding umbrella. Jacob LJ said that the sketch "conveys all you need to know". Plainly the sketch could not have been directly used for manufacture. Patterns would have needed to be designed, measured and cut. So the "you" in Jacob LJ's dictum must be a designer who understands how the sketch could be translated into a physical product. Moreover, Mr Howe submitted, the production drawings in the present case had been produced for a very limited purpose; namely to enable the assembly of the warhead and the construction of the test vehicle for the dynamic firing test. If, following a successful dynamic firing, the project had moved to the development phase, the design would have to be modified in order to integrate it into a specific missile, and to design out "clutter". If that had happened, the designer would not take the production drawings as his starting point. He would revert to the products of the mathematical modelling exercise. Thus it is those outputs, rather than the production drawings, that are the real design. Mr Moat produced examples of the variations considered during the mathematical modelling. Each variant resulted in an output of three pages. The first page recorded the shape of the shape charge, its dimensions, material composition, and similar information about the warhead casing. The second and third pages depicted in graphic form the predicted jet and its penetrative capability. Mr Howe submitted that the first page was a design document, and protected by design right; and the second and third pages, while not design documents, were protected by copyright. In either case they fell within the definition of IPR in clause 4. Although the discarded variants were not used in the further development of Lancer 2, they were by no means useless. If a customer wanted a shaped charge that would produce a differently shaped hole (e.g. shorter and fatter than the requirements of Lancer 2), one of the discarded variants might provide a useful starting point. I accept these submissions.
161. The final question under this head is whether the IPR are foreground IPR or background IPR. The scope of foreground IPR is, in my judgment, determined by "the contract requirements". The relevant contracts must be contracts with third parties, such as Raytheon. In the defence industry the scope of the contract is defined by the "statement of work". In my judgment IPR generated by activities covered by a statement of work is foreground IPR. The variants produced by Mr Moat (and the others of which they were samples) were, in my judgment, produced in fulfilment of the contract awarded by Raytheon. They are, therefore, foreground IPR. Since they are foreground IPR relating to the design of the shaped charge (or are otherwise part of a warhead subsystem), the foreground IPR is owned jointly by SEI and SEI (UK), and SEI is entitled to free user rights.

Fiduciary duty

162. SEI claim that SEI (UK) owed it fiduciary duties arising out of the Agency Agreement. Mr Young points out that under the terms of the Agency Agreement SEI (UK) had no authority to bind SEI contractually. Thus, he submitted: "No fiduciary duty can arise from what is in effect merely an agreement to promote sales of SEI's products or certain products which SEI may have an interest in manufacturing in the future." His submission, as he developed it orally, was that unless an agent could bind his principal, no fiduciary duty could arise. This submission confuses, as it seems to me, the contract between the agent and the principal, which is the relevant contract that gives rise to fiduciary duties; and a contract with a third party made by the agent, purporting to bind the principal vis-à-vis that third party, which the contract of agency may or may not actually authorise the agent to make. Of course the scope of the fiduciary duties will be moulded by the terms of the contractual relationship between agent and principal: Kelly v. Cooper [1993] AC 205. But there is no requirement for the agent to be able to bind the principal vis-à-vis third parties before fiduciary duties arise. To take two familiar examples, no one doubts that a solicitor or an estate agent owes fiduciary duties to his principal, but in neither case is he ordinarily authorised to bind his principal contractually.
163. The basic features of fiduciary duties were explained by Millett LJ in Bristol & West Building Society v. Mothew [1998] Ch 1 at 18 as follows:

"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations."

164. In my judgment all these duties were imposed upon SEI (UK) in its capacity as SEI's agent; and in particular in its capacity as agent promoting SEI's services in connection with both MWS and fuzes and associated equipment.

Infringement of Trademark

165. SEI had registered its logo as a Community Trade Mark. The logo consisted of the letters "SEI" in a box. Above the letters was a white circle against a black background. The circle itself contained two right-angled bars arranged in the rough shape of a cross. Projecting from the circle were white rays. The mark was registered in respect of a number of categories, including:

"Firearms and launch weapons, ammunition, projectiles, explosive devices, mines, missiles, torpedoes and explosives."

166. Until the late autumn of 2001 SEI (UK) used SEI's logo on its own stationary, including letterheads, fax cover sheets, invoices and reports. However, from about November 2001 SEI (UK) used a modified form of the logo in which the white rays were replaced by a stylised Union Jack. The earliest example in the bundle is, I think, an agenda prepared for a meeting held on 8 November 2001. SEI (UK) used the modified logo in correspondence with, among others, SEI itself. The letters of 5 March 2002, purporting to terminate the third Teaming Agreement, and the letter of 5 April 2002, terminating the agency and consultancy agreements, all bear the modified logo. Withers LLP objected to the use of the mark by letter dated 10 May 2002, and asked for confirmation within seven days that the mark would be removed from the letterhead. Although the written confirmation was not given, the next letter from SEI (UK), dated 6 June 2002, bears a completely different logo which bears no resemblance to SEI's mark. It did, however, continue to bear the letters "SEI". The agency agreement terminated on 5 July 2002. On 30 July 2002 SEI (UK) changed its name to Ordnance Technologies (UK) Ltd. Thereafter not even the letters "SEI" appeared on its stationery.
167. SEI's complaint is two-fold. First, it says that use of the modified logo is an infringement of the mark. Second, it says that use of the letters "SEI" after the termination of the agency agreement is also an infringement of the mark.
168. An examination of SEI's web site through to the late summer of 2002 shows that it held itself out to the public as having an office in the UK. That can only have been a reference to SEI (UK). There are examples in the documents of Dr Obst expressing the view that SEI and SEI (UK) should be seen to be acting as a multi-national team. SEI (UK) placed its own logo on the test vehicle at the dynamic firing test. However, I have found that Ing Gatti knew in advance that that would happen and did not protest. In the light of all that, and in the light of SEI (UK)'s swift reaction to Withers' letter of complaint, I conclude that SEI tacitly consented to any infringement of its mark that SEI (UK) committed before the termination of the agency agreement. So far as the use of the letters "SEI" is concerned for the few weeks between termination of the agreements and the change of name to Ordnance Technology Ltd, SEI (UK) was using its own name. In my judgment there was no infringement of SEI's mark.

Causes of action arising out of the Dynamic Firing Test

169. Breach of contract. SEI claims that SEI (UK) was in breach of clause 3 a) of the Teaming Agreement by itself becoming the lead contractor, rather than procuring the award of a contract to SEI, with SEI (UK) as sub-contractor. SEI (UK) accept that this was a breach of contract. SEI do not claim damages at this stage, but seek an inquiry into damages if liability exists. Mr Young says, and I accept, that an inquiry is pointless if I am satisfied that the breach could have caused no possible damage to SEI. If I am so satisfied, I should simply award nominal damages to SEI. I will return to this later.
170. Conversion. SEI claims that SEI (UK) converted chattels belonging to it when it instructed PAL to proceed to assemble the warhead in preparation for the Pendine test firing. PAL assembled the warhead using a charge case and liner which had already been manufactured for the static firing test and it also used an initiator assembly similarly manufactured. I find that SEI had paid for all three items, and all three items belonged to SEI.
171. In Kuwait Airways Corporation v. Iraqi Airways Co (Nos. 4 and 5) [2002] AC 883, Lord Nicholls of Birkenhead said:

"Conversion of goods can occur in so many different circumstances that framing a precise definition of universal application is well nigh impossible. In general, the basic features of the tort are threefold. First, the defendant's conduct was inconsistent with the rights of the owner (or other person entitled to possession). Second, the conduct was deliberate, not accidental. Third, the conduct was so extensive an encroachment on the rights of the owner as to exclude him from use and possession of the goods. The contrast is with lesser acts of interference. If these cause damage they may give rise to claims for trespass or in negligence, but they do not constitute conversion."

172. Infringement of design right. SEI claims that the assembly of the warhead by PAL, on the instructions of SEI (UK) infringed its design right. First, it says that it owned the design right in the design of the warhead and initiation system. This is the "warhead system" of which the foreground IPR belonged to SEI. The assembly of the complete warhead involved the making of an article to that design. Thus there was a breach of section 226 (1) (a) of the 1988 Act. In addition, it says that the re-importing of the filled warhead from Sweden (where it had been filled by NAMMO) was a further infringement. This was a breach of section 227 (1)(a) of the Act.
173. Both the claim in conversion and the claim for infringement of design right are claims in tort. Each are dependent on the absence of consent to the allegedly tortious act. In my judgment it is clear that SEI consented to the assembly of the warhead for the purposes of the dynamic firing test. It instructed PAL to carry out that process. The process of assembly included the export of the warhead to NAMMO in Sweden for filling, and the importation of the filled warhead. Although the ITP placed a limit on liability on the part of SEI of £5,000, I do not think that that detracts from the substance of the consent. If PAL had gone ahead with the whole of the assembly despite the limitation of financial liability, SEI could have had no complaint. Mr Sgarzi accepted as much in his evidence. Mr Howe's real complaint was that SEI (UK) had "taken over" the contract. But at the same time he was at pains to establish that, at least in the minds of PAL and Raytheon, the contract continued with SEI. In my judgment that does not amount to conversion or infringement of design right; or, if it does, it has not caused any damage to SEI. The claim in conversion and the claim for infringement of design right therefore fail.
174. Passing off. The complaint here relates to SEI (UK)'s logo. SEI (UK)'s logo was placed on the test vehicle, and it also featured on some of its correspondence. There is, I think, no doubt that the logo would have led a reasonable person to believe that SEI and SEI (UK) were, to put it loosely, part of the same organisation. Mr Howe accepted that he had established no damage arising out of this. However, he submitted that a cause of action in passing off is complete if there is a likelihood of damage, and that there is no need to prove actual damage. My initial reaction to this submission was scepticism, since it was not clear to me what damages could be awarded if a claimant proved merely a likelihood of damage but no actual damage.
175. In Reckitt & Coleman Products Ltd v. Borden Inc [1990] 1 WLR 491 (the "Jif" lemon case) Lord Oliver said:

"The law of passing off can be summarised in one short general proposition - no man may pass off his goods as those of another. More specifically, it may be expressed in terms of the elements which the plaintiff in such an action has to prove in order to succeed. These are three in number. First, he must establish a goodwill or reputation attached to the goods or services which he supplies in the mind of the purchasing public by association with the identifying "get-up" (whether it consists simply of a brand name or a trade description, or the individual features of labelling or packaging) under which his particular goods or services are offered to the public, such that the get-up is recognised by the public as distinctive specifically of the plaintiff's goods or services. Secondly, he must demonstrate a misrepresentation by the defendant to the public (whether or not intentional) leading or likely to lead the public to believe that goods or services offered by him are the goods or services of the plaintiff. … Thirdly, he must demonstrate that he suffers or, in a quia timet action, that he is likely to suffer damage by reason of the erroneous belief engendered by the defendant's misrepresentation that the source of the defendant's goods or services is the same as the source of those offered by the plaintiff." (Emphasis added)

176. In Conzorzio del Prosciutto di Parma v. Marks & Spencer plc [1991] RPC 351 Nourse LJ described the classical trinity of (1) a reputation or goodwill acquired by the claimant in his goods (2) a misrepresentation by the defendant leading to confusion or deception causing (3) damage.
177. These passages suggest that, except in an action to restrain a threatened wrong by injunction, it is necessary for a claimant to prove actual damage, otherwise the tort is not complete. However, Mr Howe relied on Draper v. Trist [1939] 3 All E.R. 513. In that case Sir Wilfrid Greene MR said:

"The right which is infringed in a passing-off case is one which was regarded at law as one the mere violation of which led to damage. In other words, it was not regarded at law as a case in which damage was of the gist of the action. It is true that in the old cases at law the element of fraudulent intent was a necessary element in the commission of the tort. I have already referred to that matter, and I propose to say no more about it, but the position was that a jury, properly instructed, were entitled to award damages as for the violation of a right, and that at the least the plaintiff would be entitled to nominal damages, as he would always be entitled to nominal damages on the violation of a right."

178. Draper v. Trist was not cited in the Jif lemon case. I do not, therefore, think that I can assume that it has been disapproved. In the light of that authority, I am bound to hold that a case of liability in passing off can be established, even if no actual damage has been proved.
179. However, for the same reasons that led me to conclude that the claim for infringement of trademark fails (i.e. tacit consent by SEI), the claim in passing off fails too.
180. Following the circulation of my draft judgment, Mr Howe invited me to reconsider my finding on passing off. He submitted that he had put his case on a wider basis than a complaint merely about the logo. He said that it was passing off for SEI (UK) to have represented itself both to Raytheon and PAL as a branch or agency for SEI, when it was attempting to take the benefit of the dynamic firing test contract for itself. However the fact remains that SEI itself represented to the world that SEI (UK) was its branch or agent. I am not persuaded that I should alter my conclusion.
181. Breach of fiduciary duty. It is evident, as Mr Cardy himself accepted, that there was a conflict of interest between SEI and SEI (UK). SEI (UK) put its own interests above those of SEI. Thus there was, in my judgment, a breach of fiduciary duty. If SEI (UK) made any profit out of the dynamic firing test, it is liable to account to SEI for that profit. Although it has not been proved that SEI (UK) did make a profit, the figures that Mr Cardy gave to SEI suggest that it may well have. This can be investigated in an inquiry.
182. Disclosure of confidential information. The dynamic firing test resulted in a report which was sent to (among others) the MoD. SEI says that this report involved the disclosure of confidential information. Mr Moat accepted that the computer modelling involved in the production of the report involved using computer input files from the Lancer project. I am not convinced that disclosure of this information was a breach of clause 22 of the agency agreement. In carrying out the dynamic firing test, and producing the report, SEI (UK) was not acting as SEI's agent, and the carrying out of such a test was not within the scope of the agency agreement. If the allegation of misuse or disclosure of confidential information is to be sustained, it must be on non-contractual grounds.
183. The conventional elements of a claim for breach of an obligation of confidentiality are that:

i. The information in question must have the necessary quality of confidence about it (i.e. it must not be something which is public property and public knowledge)

ii. The information must have been imparted in circumstances importing an obligation of confidentiality and

iii. There must be an unauthorised use or disclosure of that information.

(See Coco v. AN Clark (Engineers) Ltd [1969] RPC 41).

184. In the present case:

i. All information relating to the characteristics of the shaped charge, and the modelling, was confidential, since they were trade secrets;

ii. The third Teaming Agreement was backed by a confidentiality agreement and both SEI and SEI (UK) were engaged, under the Teaming Agreement, in a joint venture. The joint venture involved the use of highly confidential processes and information. In my judgment an obligation of confidentiality arose.

iii. The production of the report and the further mathematical modelling that took place was not authorised by SEI.

In my judgment there was a breach of the duty of confidentiality.

185. That leaves the admitted breach of clause 3 a) of the Teaming Agreement. Mr Young submits that there can have been no possible damage to SEI, and hence I should not order an inquiry, for the following reasons:

i. As from the end of May 2001, as a result of dissatisfaction with SEI's performance over the static firing, Raytheon were not prepared to contract with SEI.

ii. Raytheon were not prepared to fund the full cost of the dynamic firing test, and SEI were not prepared to fund any part of the shortfall. Thus if the scheme of the contract had been adhered to, the dynamic firing test would not have happened.

iii. The MoD's sensitivity about being involved in funding any part of the Lancer program left SEI (UK) in the position of having to make a difficult decision, which it did in good faith.

iv. In spite of the fact that SEI did not contribute to the cost of the dynamic firing test, it in fact benefited from the test, because its logo was on the test vehicle and representatives of SEI, and its guests from the Italian Air Force attended the test.

v. SEI have not lost any business opportunity to promote Lancer 2, because Raytheon would not have contracted with SEI anyway.

vi. So far as IPR rights are concerned, SEI was only entitled to rights in the shaped charge design for the Lancer 2 warhead, and SEI (UK) have not revealed that to anyone.

186. My conclusions on these points are as follows:

i. I have already rejected Dr Castillo's evidence that Raytheon would not have placed contracts with SEI; and even Dr Castillo was not aware of the true ownership of intellectual property rights.

ii. Although SEI were not prepared to commit themselves to funding the test at the time they were asked, since they were never consulted about the possibility of an approach to the UK MoD, it is impossible to say whether or not they would have been prepared to contribute to part of the cost.

iii. In approaching the MoD, SEI (UK) did not inform the MoD of SEI's involvement, or its proprietary rights in the intellectual property. Had the MoD been given complete information, there might well have been no objection to the involvement of SEI as lead contractor.

iv. SEI did gain some benefit from the dynamic firing test, but might have gained more if it had been recognised as lead contractor.

v. Raytheon were never made aware of SEI's proprietary rights in the intellectual property. Had it been fully informed, SEI might well have been involved in subsequent programmes.

vi. SEI were entitled to intellectual property rights in more than simply the shaped charge design.

187. I do not mean to pre-empt the outcome of an inquiry into damages, but I am not satisfied that no possible damage has been caused to SEI. I propose therefore to order an inquiry into damages.

Causes of action arising out of the Warhead Trade Study

188. SEI claims that in accepting the contract from Raytheon to produce the warhead study, SEI (UK) was in breach of clauses 3 a) and 3 c) of the Teaming Agreement and in breach of fiduciary duty. SEI (UK) concede that, if clause 3 c) is valid (as I have held it is), there was a breach of that clause.
189. The SEI (UK) witnesses, Mr Cardy and Mr Moat, suggested that the subject-matter of the Warhead Trade Study was not a "design" but a "concept". In the context of the Teaming Agreement this is, to my mind, a distinction without a difference. Clause 3 a) speaks of contracts for the "design" of MWS, whereas clause 3 b) entitled SEI (UK) to be the sub-contractor for the "design concept". Clause 5, which sets out the workshare, allocates to SEI (UK) the "generation of design data". The latter is, in my judgment, apt to include the mathematical modelling. The report which SEI (UK) produced also refers to their work as "design". In my judgment there was a breach of clause 3 a) as well as 3 c).
190. In addition, once again, SEI (UK) had a conflict of interest. Once again it preferred its own interests to those of SEI. In my judgment it was also guilty of breach of fiduciary duty.
191. I will order an inquiry into damages in relation to these two causes of action.
192. SEI also claim that in carrying out work for the Raytheon Trade Study SEI (UK) infringed its intellectual property rights under the Teaming Agreement. It was not possible to investigate this in the course of the trial as SEI (UK) had refused to disclose the relevant documents. I made an order for disclosure which is in the course of being complied with. That issue will have to wait for another day.

The Paveway III Contract: the Facts

193. One of the munitions in use by the UK military was a laser-guided bomb called Paveway III. The bomb must, of course, be detonated. The process of detonation begins with a multi-function bomb fuze which arms itself on impact. The fuze ignites a booster, which in turn detonates the bomb. In domestic terms, the fuze is a match, the booster is a firelighter and the bomb is the fire. The MoD had already commissioned a UK fuze. Paveway is a bomb manufactured by Raytheon. When the UK decided to buy that bomb, the MoD insisted that Raytheon fit the UK fuze into the bomb. The fuze had to be adapted in order to fit the bomb, and because it was not powerful enough on its own to ignite the bomb, a booster was also needed. SEI had previously designed an adaptor and booster for the United States, so Raytheon selected SEI as sub-contractor. Thus it came about that SEI was the design authority for the booster adaptor. The contract was known as the Multi-Activity Contract ("the MAC contract").
194. However, the fuze had developed technical problems, the details of which do not matter. On 13 March 2001 a meeting took place between representatives of DERA and Messrs Haigh and Groves, both recorded in the minutes of the meeting as representing SEI (UK). However, the minutes were signed by Mr Haigh on behalf of SEI and they were printed out on SEI notepaper, giving the Italian address. DERA was the Defence Evaluation and Research Agency. During various stages arising out of privatisation, this agency subsequently changed its name to New DERA (NDERA) and then to QinetiQ, but I shall refer to it throughout as DERA. The meeting was convened at least partly to discuss a work share in order to overcome the technical problem that had arisen. Again the details do not matter, save to say that they concerned the performance of the fuze, but it was agreed at the meeting that the work would be shared between SEI and DERA. So far as timing was concerned, the minutes say that live weapon trials were scheduled for February 2002; consequently the trials of the new booster would have to be completed by September/October 2001. The minute concluded:

"Due to the sensitive nature of this programme the UK MOD would prefer that this contract is placed with a UK company."

The minute was signed by Mr Haigh, this time under the title:

"S.E.I. – Società Esplosivi Industriali

Programme Manager"

195. By 30 March it seems that Raytheon Systems Ltd was in discussion about Paveway III with the Air Launched Munitions Air Group, part of the Defence Logistics Organisation. Raytheon proposed an analysis of the two possible technical solutions. It is clear from their letter that they envisaged that the work would be undertaken as a design modification under the MAC contract. Their recommendation was as follows:

"As it is anticipated that the incorporation of the correct solution will be a Design Modification, it is recommended that ALM AG raise a task on Raytheon Systems Limited via the Multi Activity Contract to investigate and recommend the preferred solution. It would then be Raytheon Systems Limited intention to add DERA to the list of sub-contractors in the execution of the task.

Raytheon Systems Limited look forward to your instruction and will, when directed, seek quotations from PAL, LMS, SEI and DERA to undertake the initial activity."

196. On 1 May 2001 Mr Haigh prepared a quotation for the booster project. The front sheet stated that the copyright in the document belonged to SEI and that it was supplied by SEI. The quotation began with a general description of SEI's business and facilities. A copy was sent to SEI, where it was received on 10 May. On 11 May 2001 Mr Haigh wrote to SEI about Paveway III. He referred to the meeting with DERA "at which DERA requested SEI to quote". However, he continued:

"As it would appear that the contract is to be awarded to SEI (UK) Ltd I would ask you to please revisit your original quotation and provide a firm fixed price for conducting the tasks identified in the proposal.

As you have been made aware this tasking is of a sensitive nature and as such DERA have requested that it be conducted by a UK company. In due course SEI (UK) Ltd will flow a purchase order down to SEI."

197. On 31 May Mr Cardy sent a fax to SEI about the booster programme. He said:

"1. The Program is a UK classified program and must be conducted in the UK due to the operational sensitivity.

2. It is not part of the normal Paveway III MAC contract as it is a DERA research initiative funded directly by Deep Strike. If the outcome is successful it will transition to Raytheon as a product improvement via the MAC contract if not some other solution must be found.

3. Originally DERA who are undertaking the task were going to design and prove a replacement adaptor booster assembly working with RO and Portsmouth Aviation. I persuaded DERA that SEI UK could jointly work with them such that SEI S.p.A. would retain their Design Authority position and also produce the 2000 new production systems. DERA and UK MOD has accepted this proposal as it maintains the security position with all tasks being UK based. They did accept that supply of new boosters could be sourced from Italy for the research program if delivery could be achieved in line with completion of the task by September (the program is a Urgent Operational Requirement).

4. The request was passed to Antonio for the supply of boosters but they apparently cannot be supplied within the program timeframe so we are obtaining a quotation from Pains Wessex. The MOD will not accept a delay in the program."

198. Mr Haigh said that Ing. Gatti had supplied him with prices in order to enable him to prepare the quotation. He identified a document dated 12 April which contained the figures. That document indicated that the boosters could be produced within about 10 weeks. So there does not appear to have been any production difficulty in manufacturing the trial boosters by "September/October". The problem, it seems, was in obtaining an export licence from the Italian authorities. Mr Cardy suggested in his oral evidence that restrictions on export licences could be overcome by a request from the UK government to the Italian government, followed by the despatch of RAF transport to take ownership of the equipment in Italy. He said that this procedure was commonplace in time of war or conflict. This seemed to me to be an implausible solution. First, he said that one of the reasons for the alleged secrecy of the program was to prevent the technical problems becoming known outside the UK. If so, revealing the nature of the operational requirements to the Italian government is hardly calculated to advance that purpose. Second, if the solution was so simple, it is surprising that Mr Cardy did not mention it to SEI. He said that he had discussed this personally with Mr Sgarzi, but, yet again, this suggestion emerged for the first time in his oral evidence, and was not put to Mr Sgarzi. I reject it. Third, what was involved was a trial of a modification, not the shipping of live weapons in time of war.
199. On 8 October 2001 Mr Groves prepared a proposal for the booster. This time the copyright notice said that copyright belonged to SEI (UK) and that the document was supplied by SEI (UK).
200. On 12 December 2001 there was a meeting held at Raytheon's UK facility in Bedford to discuss the Paveway III booster. It began at 9.30 a.m. and finished at 12.30 p.m. Mr Haigh and Mr Banks (the latter of Raytheon) attended. Various attendees, including SEI, made presentations to the meeting. SEI had produced a computer model showing how a modified booster would work. The meeting agreed that this should be explored further. It is clear that, despite the apparent urgency of the program, no physical trials had yet taken place. None of the witnesses could explain why not. This meeting was held the same day as the day on which Mr Cardy and Mr Sgarzi met in Basingstoke. The minutes of the latter meeting record:

"11. Raytheon Booster Program

SC provided an update on the booster program and stated that if the research study was successful it was intended to transition the task into the MAC contract and SEII would have the opportunity to manufacture new boosters, as Qinetiq was not a manufacturing organization. SC pointed out that Pains Wessex was being used for the prototypes due to the short manufacturing time available. FS stated that SEII would have preferred to have undertaken all the work under the MAC contract but appreciated the research path rationale."

201. Mr Sgarzi's evidence was that this discussion did not take place. He said that the Raytheon booster program was not mentioned at the meeting on 12 December. Mr Cardy says that it was. I have already rejected Mr Cardy's account of the meeting so far as concerns the claim to rectify. One of the themes that ran through his oral evidence was that he did not know about the day to day running of that program. He seemed to me to be at pains to distance himself from it. He agreed with Mr Howe that he had not himself communicated anything about the booster program to SEI between June 2001 and the spring of 2002. I myself asked him whether he accepted that suggestion and he said that he did. It was only when he was re-examined and his attention was drawn to the part of the minute I have quoted that he asserted that he did, after all, communicate information about the program to Mr Scarzi. I reject this part of his evidence too. I am forced to the conclusion that the purported minutes are not authentic, but are a later fabrication.
202. However, on 6 February 2002 DERA issued a "stop notice" bringing work to a halt. The notice itself gave no details of the reasons, but Mr Banks explained that there were two reasons. First, there was a problem over licensing by the US State Department. Second, there was an issue over intellectual property rights. However, both DERA and SEI (UK) asserted that the modified booster was an entirely new design, and owed nothing to the original design developed by SEI.
203. On 20 March 2002 SEI (UK) prepared a proposal for the certification of the adaptor/booster. Again the copyright notice said that copyright in the proposal belonged to SEI (UK) and that the document had been supplied by SEI (UK). The introduction said:

"The overall assumption is made that the existing SEI S.p.A adaptor/booster assembly will be replaced with the "new" SEI (UK) Limited/QinetiQ design of an integrated adaptor/booster assembly currently undergoing development and qualification. This task would be undertaken by SEI (UK) Limited as a participant to be added to the Raytheon Multi-Activity Contract (MAC)."

204. On 30 April 2002 a meeting was convened to discuss the solution to the problem with Paveway III. Mr Sgarzi and Ing. Gatti attended on behalf of SEI. There was no one present from SEI (UK). There were also representatives of Raytheon, DERA and others. The upshot of the meeting was that a two part solution seemed the best prospect, and Raytheon were given the task of overseeing the project.
205. On 22 July 2002 Mr Banks of Raytheon wrote to the Air Launched Munitions Group. He said that ALM had developed a modification and that it would be released to Raytheon and SEI. Raytheon would accept design responsibility for the modification and SEI would accept design authority responsibility for the final design. Thus the eventual outcome was that SEI retained its position under the MAC contract.

Causes of Action arising out of the Paveway III Contract

206. SEI claims that SEI (UK) committed breaches of the Agency Agreement and breaches of fiduciary duty in entering into this contract. There can, in my view, be no doubt that the adaptor booster was a product covered by the Agency Agreement since it was an electronic fuze or equipment associated with it. A modification to that adaptor booster would also, in my view, have fallen within the scope of the Agency Agreement, since it would either have been a different type of associated equipment, or services associated with such equipment. On the face of it entry into the contract for Paveway III was a breach of clauses 8 a) and 23 of the Agency Agreement. Since entry into the contract also amounted to the preferring by SEI (UK) of its own interests over those of SEI, on the face of it, it amounted to a breach of fiduciary duty as well.
207. SEI (UK)'s defence is threefold. First, it says that since the contract was only a feasibility study, it did not fall within the scope of the Agency Agreement. The argument is that because the agent is remunerated by commission calculated by reference to "the sale price" it can only relate to the sale of goods. Bearing in mind that the Agency Agreement bears all the hallmarks of having been translated from the Italian (and was to be governed by Italian law), this seems to me to be an unduly technical interpretation.
208. Second, SEI (UK) says that SEI consented to the manner in which the Paveway II contract was set up. However, in my judgment this defence would only run if SEI (UK) had obtained the informed consent of SEI. It did not.
209. Third, SEI (UK) says that SEI has suffered no loss, since, in the event, the actual modification of the adaptor booster took place under the MAC contract, under which SEI was the design authority. There is, to my mind, considerable force in this submission. However, it more properly belongs to the scope of the inquiry into damages that I propose to order.

Personal Liability of Mr Cardy and Mr Haigh

210. SEI abandoned its claims against Mr Moat personally. I will therefore dismiss the claims against him. However, the personal claims against Mr Cardy and Mr Haigh were pursued. I will deal with Mr Haigh first, since he was only involved in the Paveway III contract.
211. The two substantive claims that SEI has in relation to the Paveway III contract is a claim for breach of contract, arising out of the agency agreement, and a claim for breach of fiduciary duty. Thus the two possible claims against Mr Haigh personally are: a claim in tort for inducing a breach of contract by SEI (UK); and an equitable claim for dishonest assistance in the commission of a breach of fiduciary duty.
212. In my judgment there are two reasons why Mr Haigh is not liable for inducing a breach of contract by SEI (UK). First, he was merely an employee of SEI (UK) and he was acting on the instructions of Mr Cardy. He was not the decision maker. Second, he did not know about the contractual arrangements between SEI and SEI (UK). In JT Stratford & Son Ltd v. Lindley [1965] AC 269 at 332 Lord Pearce said:

"It is no answer to a claim based on wrongfully inducing a breach of contract, to assert that the defendants did not know with exactitude all the terms of the contract. The relevant question is whether they had sufficient knowledge of the terms to know that they were inducing a breach of contract."

213. Mr Haigh's evidence (which I accept) was that although he knew that there was some contractual arrangement between SEI and SEI (UK), he had not read the agency agreement; and that contractual arrangements were a matter for Mr Cardy. It was not put to Mr Haigh that he knew that the Paveway III contract amounted to a breach of SEI (UK)'s contract with SEI; and in my judgment he did not know that it was. In my judgment that is insufficient to found liability in tort.
214. So far as dishonest assistance in a breach of fiduciary duty is concerned, a finding of dishonesty is a necessary ingredient. For this purpose "dishonesty" means that the defendant has been dishonest by the standards of reasonable and honest people; and that he himself had realised that, by those standards, his conduct was dishonest: Twinsectra Ltd v. Yardley [2002] 2 All ER 377. However, a court cannot make a finding of dishonesty against a defendant unless the allegation of dishonesty has been fairly put to him in cross-examination, and he has had a proper opportunity to deal with it. It was not suggested to Mr Haigh that he was dishonest. Consequently, I decline to make a finding of dishonesty against him.
215. It follows that the personal claims against Mr Haigh fail.
216. I turn next to Mr Cardy. Unlike Mr Haigh, Mr Cardy was the decision-maker so far as SEI (UK) was concerned. Unlike Mr Haigh, he knew the terms of the agency agreement. So the two reasons why Mr Haigh was not liable for inducing a breach of contract do not apply to Mr Cardy. The circumstances in which a director of a company can be jointly liable with the company were considered by the Court of Appeal in MCA Records v Charly Records [2002] FSR 401. Chadwick LJ identified a number of principles that can be derived from the case law. The relevant principles, for present purposes, may be summarised as follows;

i. A director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company – that is to say by voting at board meetings.

ii. There is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control through the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder

iii. Liability as a joint tortfeasor may arise where the individual intends and procures and shares a common design with the company that the tort shall take place.

217. SEI (UK) was both owned and controlled by Mr Cardy. He was the decision maker. In so far as SEI (UK) had an intention it was Mr Cardy's intention. There does not appear to have been any formal corporate governance, in the sense explained by Chadwick LJ. SEI (UK) simply did what Mr Cardy made it do. In my judgment Mr Cardy is liable for the tort of inducing a breach of contract. His liability extends to;

i. The breach of contract by SEI (UK) in becoming lead contractor for the dynamic firing test;

ii. The breach of contract by SEI (UK) in accepting the contract for the Raytheon Warhead Trade Study and;

iii. The breach of contract by SEI (UK) in entering into the Paveway III contract

I will order an inquiry into damages in relation to these three torts

218. So far as dishonest assistance is concerned, it is fair to say that on many occasions in the course of his cross-examination Mr Howe put to Mr Cardy that his evidence was untruthful. However, it is important to distinguish between untruthful evidence, given in the witness box, and dishonest conduct said to found liability for dishonest assistance. Having re-read the transcript, I do not consider that it was suggested to Mr Cardy that his conduct in relation to the Paveway III contract was dishonest in the sense explained in Twinsectra. I decline to make a finding of dishonesty against him, and consequently the claim for dishonest assistance fails.
219. After the circulation of my draft judgment Mr Howe invited me to reconsider my conclusion on the allegation of dishonesty against Mr Cardy. During Mr Howe's closing submissions I invited him, if he wished to, to draw my attention to any passages in the transcript in which he submitted that an allegation of dishonest was put to Mr Cardy. I invited him to do so in writing while I was considering my judgment. He did not do so until after my draft judgment had been circulated in which I declined to make a finding of dishonesty. I do not consider that it would be fair to Mr Cardy to re-open that question at this late stage, and I decline to do so.
220. I will ask counsel to draw up a minute of order to give effect to this judgment.