Before: The Hon. Mr. Justice Carnwath
 
 

B E T W E E N

JUDGMENT
 
DATED: 24 November 1994

CARNWATH J

Introduction

The plaintiff ("Pantone") is a substantial US corporation, concerned in the manufacture and sale of colour matching systems. In 1986 it engaged Mr Puttick, the first defendant (later in partnership with his wife, the second defendant), as a consultant to develop the business in the UK. In 1987 Mr Puttick also began to sell goods, and a form of distributor agreement was signed. At about the same time the defendant began to divert funds dishonestly to accounts controlled by himself and a senior Pantone employee, G Guidice. This was done largely by means of commissions paid to fictitious agents.

The business prospered. The fraud was not discovered until October 1992, when the relationship was summarily terminated. Pantone now seeks to recover money allegedly due to it, including amounts in respect of the bogus commissions, unpaid stock, and unaccounted profits. The main issue between the parties is the legal nature of the business relationship between them.

I would make three introductory points: -

(i) Happily, this is not a case where discovery of wrongdoing has coincided with financial collapse. Pantone has been, and remains, a highly successful business. Its operations in Europe have prospered, assisted in part by the defendants' efforts up to 1992. It is a tragedy for the defendants that their dishonesty has disqualified them from the opportunity to participate further in that success.

(ii) The defendants' calculated dishonesty over a long period has been frankly admitted by them. This inevitably colours my view of the remainder of their evidence. However, I have been assisted by their thorough analysis of the documents and figures, which I have found generally reliable.

(iii) Their task and mine have not been made easier by the withdrawal of legal aid in July of this year, with the result that legal representation was no longer available to them. They have presented their case with considerable skill, both in argument and cross-examination. However, they have not been able to help me with any separate submissions on the legal issues.

(iv)Credit is also due to Mr Willer appearing for the Plaintiff, and to those instructing him. They have played a large part in ensuring that the complex legal and factual material has been presented to the Court in a fair and concise way, notwithstanding the highly charged relationship between the parties.

Oral evidence was given, on behalf of the Plaintiff, by Lawrence Herbert (President); Jack Lewis (Consultant); August Agostini (Chief Financial Officer); and Howard Cohen (Financial Adviser). I also gave leave for the admission of a Written Statement by C Guidice (former Executive Vice-President). The two defendants both gave evidence in person. They also called Alec Poole (their accountant, of Phipps & Co.) and Fergus Falk (partner, Touche Ross).

Bundles of documents were prepared by both parties. In this judgment I use the following abbreviations:-

CB1 Plaintiff's core bundle, page 1.

WB4/1 Plaintiff's white bundles vol.4, page 1

D3/G/1 Defendants' bundle 3, s C, page 1

WSp 1 Witness statement page 1

In 1963 Mr Lawrence Herbert developed the Pantone Matching System, a system for colour specification, reproduction and control, initially used mainly by designers and printers. He had acquired the plaintiff company in the previous year. Since then the company has gained a worldwide market. More sophisticated systems have been developed over the years, and the variety of uses has been extended. The company now has an annual turnover of some $25 million. It is registered in Delaware, but its centre of business is in New Jersey.

Mr Herbert remains the President and Chief Executive, as well as the sole stockholder. He naturally attaches extreme importance to the preservation of the international reputation he has built up. It is clear also that he has tended to rely on the advice and expertise of a small number of close advisers. One of those was Mr Jack Lewis, an independent business consultant who has been closely involved with Pantone for many years. Another, until his part in the fraud was discovered, was Mr Guidice, who joined in 1985, and was Executive Vice-President responsible for manufacturing and marketing worldwide. He had formerly been employed by Esselte Letraset Ltd. ("Letraset"), which was a licensee of Pantone from 1972, and became its biggest customer. Other key advisers were Mr David Morgenstern, financial controller until November 1987, and his successor August Agostini; and Howard Cohen, a former tax partner with Grant Thornton, who acted as financial adviser to Pantone from 1985.

Apart from other distribution channels, Pantone had three so-called "master distributors". I have already mentioned Letraset. Another was Mode Information Heinz Kramer GmbH ("Mode Information"). Mr Kramer had a competing system in the textile field, but he agreed to collaborate with Pantone. He became a consultant to Pantone in December 1986 (CB40). A "master-distributor" agreement was signed in 1989. The third was Pantone Asia Ltd. Mr Yamagishi had been a Letraset manager in Japan, and had been well-known to Mr Herbert since 1974. Mr Herbert agreed to help him to set up on his own. He also began as a consultant. He acquired master-distributor status under an agreement in 1989.

In late 1985, Mr Herbert and Mr Lewis agreed that there was a need for Pantone to have its own "presence in Europe". They wanted someone to develop their markets there, and to provide personal contact with customers. Mr Puttick had been a colleague of Mr Guidice at Letraset, and was familiar with the Pantone system. He was also known to be (in Mr Herbert's words) "a hell of a salesman". (Having heard him as advocate and witness, this does not surprise me.

In early 1986, Mr Puttick was interviewed at Pantone's head office at Moonachie in New Jersey. Following that meeting he received a letter, signed by Mr Guidice, (4.3.86 - CB3) offering: -

"to employ you in the position of Business Manager, Europe, commencing March 24th 1986."

The starting salary was to be £27,000 per annum, with a company-paid car. A job description was attached. On 12 March (CB5), Mr Puttick replied accepting the offer, and he prepared for another visit to Moonachie to discuss details.

He also visited his accountant, Mr Poole of Phipps and Co., to discuss the position. Mr Poole explained to him that there could be advantages, both to him and to Pantone, if he operated as a self-employed consultant rather than a full-time employee. He confirmed his advice in a letter dated 20 March (CB12). This letter explained the significance of the difference:-

"Were you to be treated as employed by Pantone both the Inland Revenue and Customs and Excise could seek to treat you as a UK branch office of the company, and, as such, not only would you personally be taxed under PAYE with the company becoming liable to employers National Insurance Contributions, but Pantone could be required to register for VAT and furthermore the Inland Revenue could demand branch accounts annually in order to determine whether or not a profit had been made in the UK which was liable to Corporation Tax."

He also explained how the salary could be adjusted to enable him to purchase his own car, while spreading the cost to Pantone over three or four years. He showed how the cost to Pantone of engaging him as a self-employed consultant at a fee of £32,300 would be only £41,900, compared to £52,655 for the previous proposal.

Mr Puttick wrote on the following day (CB10) enclosing Mr Poole's letter, and asking to be "classed as self-employed". He said: -

"However, this would be cosmetic and I would expect to work as you and I have discussed and I would be willing to give any additional undertakings you might require."

(Although some attention was paid in cross-examination to the use of the word "cosmetic", I do not think it had any sinister connotation at this stage. So long as the duties were limited to those of a consultant, there was little practical difference in the method of working. No-one in the US had any reason to question Mr Poole's view. Mr Herbert consulted Mr Cohen, who, on the basis that it would be a one-man show, saw the attractions of "keeping it simple", and avoiding a corporate presence in the UK, at least in the early stages.)

Accordingly, on 22 April Pantone wrote (CB14 - again under the hand of Mr Guidice) confirming their offer, effective from 24 March -"to retain you as our European Business Consultant"at a "retainer of not less than £32,300. He was also entitled to reimbursement of "all appropriate and reasonable expenses incurred on Pantone Inc.'s behalf". The "job description" was recast as a "detailed profile", the only change being the substitution of "European Business Consultant" for "Business Manager, Europe". The letter required Mr Puttick -

"not to undertake any other work which could represent a conflict of interest."

On 24 March 1986, Mr Puttick was registered for VAT as a sole proprietor, under the classification "management consultants", at his home address. In April he was given an allowance from Pantone for the purchase of some basic office equipment (CB8-9).

During the rest of 1986 Mr Puttick worked from his home developing market strategy and customer contacts. Resulting sales were arranged direct from headquarters. Mr Puttick was treated very much as "an insider" by senior management at Pantone. (He signed a formal confidentiality agreement in September 1985 - CB16). He was allowed a large degree of latitude in running his part of the business. He reported to Mr Guidice, but there seems to have been no formal financial reporting procedure at this stage. Mr Morgenstern, the then financial controller, was apparently much less rigorous than his future successor, Mr Agostini.

He was assisted by his wife. She had a degree in business studies, and before 1978 had worked with the National Westminster Bank. In 1986, there were two children, the youngest of whom was 9 months old, and Mrs Puttick's involvement in the business was limited at first. She gradually became more active, principally on the book-keeping side, and she became a partner in April 1989. From the start, she has been fully privy to Mr Puttick's thinking.

In December 1986, Mr Puttick first formulated proposals to enable him to hold and sell Pantone products. (In retrospect this was the beginning of the sequence of events which led to the current litigation.) The idea had apparently originated from requests by customers. A paper was prepared by Mr Puttick during his visit to headquarters in December 1992 (CB37), and discussed with Mr Herbert. He proposed the adoption of the trade name "Colourpoint". The concept was described thus:-

" - To provide a distributive vehicle to sell PANTONE Professional Color System products principally wholesale and retail customers.

- To provide a limited back-up stock to UK and European distributors."

The rationale was explained:-

"In order to feed this demand, it is necessary to have an outlet. It would be inappropriate for it to be Pantone directly, as this would make it very difficult to move the distribution across to appointed master distributors as they come on line. If we dealt directly with wholesalers and retailers, it would also be difficult to persuade any potential PANTONE Professional Color System master distributor that there is a role for him. By distributing through a trade name, we have the best of both worlds. Using Colorpoint allows us flexibility and the ability to further support existing dealers."

"We" in this context seems clearly to refer to Pantone. At this stage, Mr. Puttick saw himself simply as an agent selling product for Pantone:

"As product is sold, funds will be collected and remitted to Pantone on a monthly basis."

The scale envisaged was very small. (The level of sales projected for 1987 was only $23,180). There was no suggestion at that stage that Mr Puttick expected to be entitled to retain any profits.

Mr Herbert approved the proposal (CB43). It was agreed that funds resulting from sales would be retained by Mr Puttick and used to pay marketing and other expenses in Europe (thereby avoiding exchange losses). Nobody seems to have given any serious thought to the possible tax implications of the change, in particular whether it would result in Pantone being deemed to be trading through a branch in the UK. Sales through Colour Point remained at a relatively low level (broadly between £500 and £2,000 per month) until October 1987 (WB4/9).

Another significant event during this period was the engagement of Mr Cliff Kenworthy, to assist Mr Puttick. The proposal was put to Pantone by Mr Puttick on 11 December 1986 (CB35). He said that he needed a full-time assistant to help with the planned activity for 1987:-

"To get the individual concerned will cost £26,500 per annum, plus a budget to cover travel expenses of £5,000 per year... If approved, the individual concerned will be employed by me and will work in the same manner as I do. All responsibility for payments, expenses and performance will rest with me."

This also was approved, and on 5 January (CB 42) Mr Puttick wrote to Mr Kenworthy to "retain him as a consultant" as from 2 February, stating:

"As agreed, I will pay you an annual retainer, dependent upon work undertaken, of not less than £22,000 per annum. In addition I will reimburse you for all appropriate and reasonable business expenses incurred in working for me."

Mr Puttick wrote to Pantone on 8 February (CE 44) recording the appointment, in these terms:-

"Cliff started with me on 2/2/87 and it occurred to me that I had not formally requested you to make the transfers to me each month so as to pay Cliff.

The annual payment, approved by LH, was £26,500 and I would be [grateful] if you would have an additional £2,208.33 transferred to me each month at the same [time] as you make my transfer. I will then arrange to pay Cliff as it was decided to make a payment to him through me."

The difference between the £26,500 claimed from Pantone, and the £22,000 paid to Mr Kenworthy, is one of the items of claim in these proceedings. Mr Puttick said in evidence (WS para.4) that he had added "a profit margin". This explanation was not given in an earlier affidavit (6/11/92 para.8), where the implication was that the uplift was related to VAT, borne by Mr Puttick (not a convincing explanation, since VAT would be recoverable). In any event, there was no hint of the difference in the correspondence with Pantone, which was given the impression that the money paid for Mr Kenworthy would be passed on in total. In a report in March 1990 (CB197 - see below), Mr Puttick said:-

"As with Puttick, it was decided that Kenworthy should not be a Pantone employee, to avoid any complicating factors, regarding UK employment law or company taxation."

Again, there was no mention of the "profit margin" for Mr Puttick.

In retrospect, this transaction in early 1987 seems to mark the point at which Mr Puttick first began to see the potential for dishonest exploitation of his relatively unsupervised position.

This was a critical period in the evolution of the relationship between Pantone and the Putticks. A number of strands came together towards the end of 1987:-

(i) Letraset dispute

Earlier in the year, Pantone had entered into discussions with Daler-Rowney, an English manufacturer, with a view to licensing it to manufacture and sell Pantone products. This involved a risk of objection from Letraset. According to Mr Puttick, the perceived threat from Letraset led Mr Herbert to look for alternative distributor arrangements. Mr Puttick's note of a telephone conversation with Mr Herbert on 13 October 1987 (D2/A/19) refers to discussion of an "alternative strategy", including an "alternative distributor". Although there appears to be no record of this conversation in Pantone's files, Mr Puttick's account seems plausible. Mr Herbert confirmed in evidence that part of his thinking was the desire for a "defence mechanism" in relation to Letraset, but one which could be "cut away" in the event of serious objection. (In the event, litigation between Letraset and Pantone commenced in early 1988, and was finally determined in June 1989, substantially in Letraset's favour. It is reported as Pantone Inc. v. Esselte Letraset Ltd. 691 PSupp 768, aff'd. 878 F2d 601.)

(ii) First major consignment of goods

The first substantial consignment of goods to Mr Puttick came in September 1987. Pantone's Accounts Receivable ledger for the period ending 30 November 1987 records an invoice dated 11 September for amounts totalling $59,177.50 (WB5/133).

(iii) Distributor agreements

On 26 October 1987 (CB49), Pantone's Licensing Manager sent for Mr Puttick's consideration two formal distributor agreements (one for the Pantone Matching System and the other for the Professional Colour System). The wording of the letter ("at last") suggests that the agreements had been under consideration by Pantone for some time. In due course these agreements were signed by Mr Guidice (for Pantone) and Mr Puttick, and "completely executed" copies were supplied by Pantone on 7 December (CB53 - the agreements are at CBl8-34). They were backdated to 24 March 1986.

The agreements are in the name of "G.J.Puttick trading as Colourpoint". They give him "the non-exclusive right to purchase for resale" the products listed in the Schedules. Both agreements contain "entire agreement" clauses. I note also that Mr Puttick is referred to as a "distributor", rather than a "master-distributor"; that payment "by the distributor to the company" is to be "net 30 days"; and that discounts allowed are between 25% and 45% off list price (CB333). Although there are some differences of detail between the two agreements, they are not material to the present issues. (The agreements are made under the law of the State of New York; but nothing seems to turn on differences between that system and English Law).

(iv) Review of sales arrangements

On 13 November 1987, Mr Puttick wrote two memoranda, one to Mr Guidice (CB51) and one to Mr Morgenstern (CB50). As the former records, they followed a conversation with Mr Herbert. The immediate cause was the delivery (already referred to) of £59,177.50 worth of Pantone products. These had been shipped at "standard distributor" prices, which reflected a discount of 40%, as opposed additional import duty and VAT of £7,786.40, £2,233.43 of which was irrecoverable. The matter had been reviewed with Mr Herbert. Mr Puttick recorded the following points as "approved":

"1. All future shipments to Colour Point will be billed at recommended retail prices, less 60%, irrespective of volume offtake. Colour Point should be seen to pay right and proper import duties and taxes.

2. Pantone will fund the import costs of pounds sterling 7,786.40 and the refundable value added tax element will either be returned to Pantone or rolled over to fund other imports.

3. As far as possible, Colour Point expenses and disbursements will be funded from Colour Point's cash flow.

4. I will provide a monthly accounting to Pantone for Colour Point's activities.

5. All Colour Point monies will be banked separately so as to provide visibility for Pantone."

The other memorandum was addressed to Mr Morgenstern. Mr Puttick requested immediate payment of the £7,786.40. He stated:-

"In the future we should use the following procedures:

1. Colour Point will be billed at standard recommended retail prices, less 60%.

2. Colour Point will pay all import duties and value added taxes. These amounts will be funded by either rolling over the transfer of pounds sterling 7,786.40 or using cash surpluses from Colour Point sales.

3. Colour Point will provide a monthly statement of sales activities, monies received and disbursements for control purposes by Pantone.

4. We are maintaining a separate interest bearing deposit account to which all Colour Point monies will be credited.

5. Cash surpluses will be remitted to Pantone as instructed by Pantone."

In argument, there was some discussion of the meaning of the last sentence, and the term "cash surpluses". Mr Herbert, in cross-examination by Mr Puttick said:

"You knew why those terms were used - cash surpluses meant profits, and you knew it. The presentation was that you were running a separate operation."

Mr Puttick said it meant simply that any cash surpluses left after paying marketing expenses would be used to pay outstanding amounts due for product purchase. I do not find it necessary to resolve this issue. As Mr Herbert's answer implies, the ambiguity may have been deliberate. In the event, it was overtaken by Mr Agostini's more precise formulation of the Putticks' obligations (see below).

(v) Mr Agostini arrives

On 15 November, Mr Agostini joined the company as Chief Financial Officer. At an early stage he became aware of Mr Puttick's position and clearly saw the need for his precise status to be clarified. On 4 December, he sent a memorandum (CB52) to Mr Guidice asking for Mr Puttick to prepare a "set of financial statements". As he said in evidence, "I was trying to segregate the legal tax entity from the reality of the situation."

(vi) Bogus commissions

At some point, probably towards the end of 1987, Mr Puttick conceived the idea of paying fictitious commissions into separate bank accounts for himself and Mr Guidice. The precise date is difficult to fix, because of the absence of detailed reports before 1988. The report made in January 1988 (WB4/8-9) records "commission" payments of £576.30 and £5,988.79 in 1986 and 1987 respectively. However, it appears that these figures were first compiled at the time of the report, and that they include some genuine commission payments from 1986. It is also unclear whether they represent actual cash payments, or merely estimates. Mrs Puttick calculated that the total "commission" payments to Mr Puttick and Mr Guidice before 1988 were £3,178.78 and £1,789.81 respectively. (The Plaintiffs were content to accept these figures.) She also thought that the first actual payment to Mr Guidice came in October 1987. It seems likely that the idea of dressing them up as commissions was a response to the more stringent reporting requirements imposed by Mr Agostini.

So far as it matters, Mr Puttick's explanation for the fraud was that he wanted to "shield" the profits from Pantone; he was afraid that otherwise the cash generated by his sales would all be used up in marketing expenses directed by Mr Herbert, and he would see no benefit. Mrs Puttick said that she had agreed with the "logic" of that argument, since she understood that Pantone "had an unbelievable capacity to spend money". As for the payments to Mr Guidice, Mr Puttick said that they were friends and he wanted him to share his "good fortune". He did not see it as a bribe, and he had never asked for any advantage from Mr Guidice. (Mr Guidice's understanding was that they were a reward for introducing Pantone).

(i) First financial reports

On 28 January 1988, Mr Puttick sent to Mr Agostini a note (CB61 ) with attached financial data, described as "Colour Point Financial Data for Operations to 31.12.87" (WB4/6-13). This appears to be the first detailed record that Pantone had requested or received. It also contains the first record of the fictitious commissions, which were explained in these terms:-

"At the outset it was envisaged that we would use external sales representatives who would be paid on a commission basis. This has continued and grown with the growth of Colour Point Sales. The commission rate varies with the customer type and is 25% or receipts net of VAT and postage and packing for end customer sales and 12.5% for sales to dealers."

(Mr. Puttick accepted In evidence that the reference in the same letter to payments in connection with "handling" was also "an invention to some degree"; but there is no separate claim in respect of that item.

The figures in this report are not all easy to follow. Various arithmetical discrepancies were clarified in a further note from Mr. Puttick on 7th February (CB68), which recorded a "net profit" as £11,904.33. Of more direct interest is his attempted "cross-check" by reference to the "equations":-

"Debtors = Pantone profits + commission due

Pantone Total Profit = Profit in debtors Funds in hand."

(The significance of this is the attribution of the profit to Pantone. In evidence, Mr Puttick explained this as a mistake, but agreed that the formula was "wholly in conflict with his case").

Mr Puttick's figures for 1987 were recast by Mr Agostini in a form which is easier for an outsider to follow (WB4/18-19 -a working document prepared by him following receipt of the Puttick report):

Sales £38,599.96

Cost of goods sold £16,681.90

Gross profit £21,918.06

Expenses (total) £10,013.73

Earnings £11,904.93

The precise figures are not material; but it is to be noted that both parties had already identified a "profit" on Colourpoint's operations, which needed to be addressed in the subsequent accounting arrangements.

(ii) Memorandum of 25 February 1988

Mr Agostini attempted to set out his understanding of the position in a Memorandum of 25 February 1988 (CB70), which is another key document in the case. Its contents had been discussed, and agreed, with Mr Puttick. It is headed "Colour Point - Accounting and Financial Reporting Procedures". The first three paragraphs ran as follows:-

"Business operations

Colour Point is a master distributor of Pantone Inc. of products throughout the United Kingdom and Europe. The Colour Point business is controlled by Gerald Puttick, who has a consulting agreement with Pantone Inc. which restricts him from undertaking any other business activity that could represent a conflict of interest. In addition to a consulting fee which is paid to him, he is reimbursed for appropriate and reasonable business expenses incurred on Pantone Inc.'s behalf.

Financial Obligation

Colour Point has two major financial obligations to Pantone Inc. First, it must pay Pantone Inc. for products that it purchases and, second, it must pay Pantone Inc. a management fee. The management fee is based on the fact that Pantone Inc. provides the expertise in advertising, marketing, management and accounting which Colour Point must have to operate.

Reporting Requirements

Colour Point must maintain books, records and bank accounts which are dedicated to the purchase and resale of Pantone Inc. products only. Colour Point will submit monthly. .. the financial reports listed below (copies attached):

1. Statement of earnings - including a separate detailed report indicating an explanation as to how the cost of goods sold was determined.

2. Stock Reconciliation - should track units on a consecutive month-to-month basis.

3. Cash flow - ending cash balance must reconcile to monthly bank reconciliation and supported by copy of bank statement.

It is understood that Pantone Inc. expects Colour Point to maintain up-to-date records of all financial activity (i.e. Accounts Receivable/Payable, listings by individual firms). Pantone Inc. may request from time to time that additional information be provided on a monthly basis Further, Pantone Inc. may engage, from time to time, an independent certified public accounting firm to conduct audits of the books and records of Colour Point."

Colour Point was to have two bank accounts "totally dedicated to handling Pantone Inc.'s activity" (one apparently was to be interest-bearing - see CB72). Mr Puttick's consulting fee would be reviewed to determine whether -

"an increase is appropriate to recognise the additional level of services provided to Pantone Inc. in 1987 and that which is expected in 1988."

(This Memorandum was strongly relied on by Mr Puttick: first, because it confirms his status as a "master-distributor", and secondly because it contains nothing to rebut the ordinary inference that such a distributor can retain the profits from his own sales.)

(iii) "Management fee"

It Is necessary to dwell for a moment on the reference to a "management fee". Mr Agostini said in evidence that he was "sensitive" to the need to have arrangements which were acceptable to the UK and US tax authorities, and this Memorandum was meant to be "the official document from a tax point of view". -According to him, the concept of a "management fee" was devised in discussion with Mr Cohen and Mr Puttick. It was designed to deal with the problem that the profits, as such, could not be repatriated, since Mr Puttick was not a direct subsidiary; the only way to transfer funds in a way acceptable to the tax authorities would be by means of an invoice for products supplied or a management fee for services rendered. In the event, no management fees were ever levied, because "the surpluses could always be set against the other expenses." However, he was sure that Mr Puttick fully understood "the management fee concept".

Mr Herbert was also aware of the management fee provision. In evidence (in answers to my questions on the Memorandum of 25.2.88) he was quite frank about its purpose:-

"Q... It does not look like another name for profits.

A... It was another name for profits.

Q. What Is the point of that? Perhaps more directly, how is that dealt with then for US tax purposes?

A. If we received the management fee from product operation over there, we would simply include it in our profits and pay the taxes in the United States.

Q. Why is it called a management fee, if it is really straight profits?

A. Because we did not have a legal presence in the UK at the time. It was a facade."

(iv) The arrangements in practice

Mr Willer relied on various documents as showing that the Putticks themselves regarded the profits as belonging to Pantone, and expected a "management charge" to be used as the means of transferring them (so far as not offset against expenses). For example, in a note to Mr Agostini dated 15 March 1988 (CB72), Mrs Puttick recorded that there was "cash available" of some £32,000, which was "sufficient to pay the accounts payable due to Pantone". She referred to two specific items which she suggested should be invoiced as management charges, and continued: -

"In addition, I would also recommend that Pantone invoice Colour Point with a management charge to cover the profits earnt on Colour Point activities up to April 30th 1988. If we do not have this charge by that date we will incur an income liability for all the funds held."

In evidence, her explanation for this was that she had heard that there might be management charges (she had met Mr Agostini in America the previous month), and was anxious that any such charges should be raised before the end of her accounting year. However, as she agreed, the wording of the letter implies rather more than a mere possibility. Mr Puttick explained this as "a mistake".

Similarly, in the following year (Memo. 5.1.89 - CB107), Mrs Puttick raised with Mr Agostini the treatment of profits, in connection with an invoice relating to expenses paid by Colour Point: -

"Whilst Colour Point has been paying the charges represented by this invoice, the profit on the operation was reduced. However, by raising this invoice, we are reinstating this profit, which will be taxable. At present, we are only compiling figures for the Inland Revenue to April 1988. However, we shall have to discuss with you further the question of Pantone Inc. raising an invoice on Colour Point for the relevant profit. Alternatively, we could pay the due tax from funds held here for Colour Point, rather than transferring the profit to the U.S. How do you feel about this?"

In evidence, both the Putticks emphasised the word "relevant", which, they said, implied that only an appropriate part of the profits would be the subject of a charge.

Another example is a note of 18 November 1989 to a Mr Tony Cupo (manager of Pantone's Customer Service Department). It refers to possible sales through Colour Point to foreign markets which: -

"will permit Pantone Inc. to obtain a higher price than is possible by direct sales from the USA." (emphasis added)

Mr. Puttick described this as another "mistake"; Mrs. Puttick said that it was signed by her in Mr. Puttick's absence.

Conversely, Mr. Puttick relied on various Pantone documents as tending to show that Colour Point was treated as an independent "master-distributor", no different from Pantone Asia or Mode Information. For example:-

(a) In 1990, Mr. Herbert was considering the possibility of a private placement of some Pantone stock. He commissioned a report on the business from Smith Barney (described by him as "investment bankers"), which was intended to be shown to potential purchasers (but not more generally - Mr. Puttick appears to have obtained an unauthorised copy from Mr. Guidice). The only significance of the report for present purposes is its treatment of Colour Point, presumably on the basis of information supplied by Pantone. They are listed (along with Letraset, Pantone Asia and Mode Information) as among the "top five distributors" of Pantone products (D,13/M/18).

(b) In the 1990 Marketing Plan for Pantone Matching Systems, Colour Point are listed as a "master distributor", again along with Letraset, as part of the "target audience" for "direct sales" (D/2/JK/3).

(c) On 1st February 1990, Mr. Agostini requested a certificate for their auditors (Grant Thornton) confirming the "balance due" from Colour Point as at 31st December 1989 (then $309,319.98). This was confirmed by Mrs. Puttick the following day. The figure relates solely to the outstanding balance on purchases from Pantone. There is nothing to suggest that proceeds from Colour Point sales were treated as a debt to Pantone.

None of these references seems to me to be inconsistent with the basic arrangements established by Mr. Agostini in February 1988. On the one hand, I did not find the Putticks' explanations of the "mistakes" convincing. I think they did expect Pantone to make a claim to the Colour Point profits, and they expected this to be done by means of management charges. This, no doubt, was one of the reasons why they felt it necessary to extract money via the fictitious commissions. On the other hand, whatever their expectations, no management fee was ever requested by Pantone. What is quite clear is that, for accounting and tax purposes on both sides of the Atlantic, and for presentation to third parties, Colour Point was treated by both parties as a separate operation.

(v) Financial records

It may be noted at this stage that the Puttick's accounting system was not of great sophistication. Mr. Poole had explained to them in 1986 how to operate a simple "receipts and payments" accounting system. This was used to prepare accounts for tax purposes. It was adequate in the early stages but became strained as the business grew. Although Mrs. Puttick later used a computer system, the old system remained as a back-up and continued to be used for tax purposes. Mr. Poole was not involved in the preparation of reports for Pantone.

The task of reconciling the Pantone reports to the accounts presented to the Revenue does not appear to have been attempted. It would be made more difficult by the fact that the Puttick's accounting year ran to 30th April, whereas the Pantone reports were prepared by reference to calendar years; and also by the fact that the UK accounts related to the whole of the Putticks' activities. Furthermore, the bogus "commissions" payments were treated differently in the accounts prepared by Mr. Poole, those to Mr. Guidice being treated as deductible expenses, those to Mr Puttick being treated as drawings.

Mr. Poole, who seemed to me both straightforward and competent, was able to prepare, from the data provided by Mrs. Puttick, accounts satisfactory to himself and to the Revenue. (Mr. Poole was aware that payments were being made to Mr. Guidice for what he understood to be genuine consultancy services; he did not know that Mr. Guidice was a Pantone employee.) Following the 1992 audit (see below), when he had an opportunity to review the financial management reports supplied to Pantone, he agreed with Mr. Cohen that:

" ... they are inadequate and do not, on the basis prepared, reconcile to the annual financial accounts."

It is fair to record that Mr Falk, a partner in Touche Ross who prepared an expert report in these proceedings on behalf of the Putticks, was able to satisfy himself that the Putticks' explanations were consistent with the documentary material provided. (Mr Falk was not able to help greatly on other issues in the case, since he had not been brought up to date with much of the material which had emerged since his active involvement in the case in late 1992 and early 1993).

Generally, I had the impression that, apart from the deliberate fabrication of the commission payments and other matters which are now specifically admitted, the records kept by Mrs Puttick were broadly accurate. Fortunately, it is unnecessary to go into further detail, since the figures directly material to the claim are now agreed (see below).

The ground rules having been established to the satisfaction of both parties, the business relationship developed successfully for the next three years. I should refer to various points to which importance has been attached in submission:-

(i) Consultancy fees Mr Puttick continued to be paid his consultancy fee, which was increased from time to time (see for example CB119). He also received (as did Mr Kenworthy) a performance "bonus" in January 1989 (CBllO). In cross-examination, he agreed that this was odd, in the sense that consultants do not normally expect to be paid bonuses, but he thought he had deserved it. Mr Puttick continued to describe himself as "European Business Consultant" when advising customers (see, for example, a letter dated 25/9/89 to GFT Software Products - CB143).

(ii) Office accommodation In February 1988, Mr Puttick planned to take out a bank loan of £30,000, secured by a second mortgage on his home, to fund the cost of the provision of office accommodation. He asked Pantone to increase his monthly transfers by £518.36 to cover the repayments (CB69). This was approved (CB86)

(iii) Ford Communications In about February 1989. Mr Puttick began to pay this firm for public relation services on a monthly retainer, which he notified to Pantone as £1,500 per month (CB118). As in the case of Mr Kenworthy, the amount actually paid to Ford Communications was substantially less. Mr Puttick's "profit margin" was not disclosed to Pantone. Mrs Puttick calculated that the total of these differences, over the whole period of the retainer, was £28,940.

(iv) Financial assistance Mr Herbert claimed that between the commencement of the relationship and April 1990 "Pantone Inc. provided $1,164,630.76 in direct funding" (WS p 9). The breakdown of this figure appears in CB388, which was a table prepared in Mr Agostini's office in late 1992. A large part consists of the consultancy fees paid to Mr Puttick and Mr Kenworthy and their travelling expenses, which, on any view of the relationship, were Pantone's responsibility. The other items seem largely of a revenue nature, and they would need more analysis for any inferences to be drawn. I agree with Mr Puttick that this table is not of any real assistance in defining the nature of the relationship.

(After April 1990, there were no further transfers of cash from Pantone. By this time, the European operation was sufficiently established to be self-financing. Pantone itself was feeling the effects of the recession, and in particular was experiencing cash-flow problems following the cancellation of a large order by a major distributor.)

(v) Credit periods As has been seen, the original agreement provided for credit of only 30 days. Mr Willer made something of the fact that in practice this was never enforced, and he sought to draw a comparison with the more stringent treatment of Pantone Asia and Mode Information. However, the precise contractual position remained confused. Mr Puttick referred to a page apparently attached to the Pantone copy of the Colour Point distributor agreement (D2/A/29), which appears to show a change to credit terms of 180 days in 1991. It is annotated "Auditors 2/7/91" (ie 7 February). A similar note was found in the Pantone Asia agreement, relating to a change to 360 day credit (D3/L/15,29). In any event I do not believe anything useful can be drawn from the credit terms. In practice, it is impossible to disentangle them from the arrangements under which Pantone expenses were funded out of the Colour Point account. (It is noteworthy that, although the reports for 1988 and 1989 showed significant "earnings" of £48,430.56 and £36,470.70 (WE4/138,251), no direct claim was made on them by Pantone at the time. Mr Herbert's explanation was that he wanted to keep as much money in Europe as possible).

(vi) Extraordinary items As has been seen, it was part of the arrangement that Pantone expenses in Europe should be funded out of cash surpluses held in the Colour Point account. Both Mrs Puttick and Mr Agostini sought to maintain a distinction between expenses properly attributable to Colour Point itself, and those attributable to head office ("extraordinary to the profit centre"). The latter were seen as head office liabilities, which would be met, either by a transfer of cash to the Colour Point account, or by a "set-off" against Colour Point's liabilities for goods supplied.

This mechanism can be illustrated by reference to an early example in the documents, related to the expenses associated with the "IPEX" trade show in Birmingham in 1988. In July, Mr Agostini approved the use of "Colour Point funds" for a down payment on a stand at the show, and told Mrs Puttick to include it as an extraordinary item (CB92). In October, because there was insufficient money at that time in the Colour Point account, Pantone made a cash payment of £10,770.90 (CB130-1). On 9 November (CB102), Mr Agostini confirmed a set-off for a total of £68,703.32, including various IPEX costs. An invoice was drawn up by Colour Point in the sum of £68,703 ($120,230.81) (CB104). The copy in the papers is annotated by Mr Agostini:-

"To offset marketing and trade expenses due Colorpoint against their [accounts receivable] account".

The same figure appears in the Cash Flow statement for January 1989 (WB4/146) as an "offset" from the cost of purchases. (It was this invoice which led Mrs Puttick to seek advice on the treatment of the resulting "profit" at CB107 - see s 6(iv) above.)

(vii) Special transactions Examination of the trading position as between Colour Point and Pantone is also complicated by certain unusual transactions.

For example, in December 1989 there was a special order for "swatch cards" (which are samples of different coloured fabrics) made in December 1989. According to Mr Agostini, he and Mr Guidice had discussed the fact that their sales were "trailing" and needed "bolstering". This seems to have been due in part to Letraset de-stocking, and the consequent difficulties Pantone saw in meeting the performance targets in their bank loan agreements. Mr Agostini also mentioned Mr Guidice's wish to improve his own bonuses.

Orders worth a total of $279,073.40 were placed with Colourpoint, with the proviso that they could return any unsold stock within six months (D2/HI/1, M/5,6). This was an acknowledgement of the fact that they were not a type of stock normally held by Colour Point. (As Mrs Puttick pointed out (CB255), the swatch cards were covered by Pantone' exclusive agreement with Mode Information, and could not in practice be sold to customers other than them.) In June 1990, Mrs Puttick asked for, and was granted, an extension for a further six months (D2/G/39,40). By January 1991, the swatch cards were still unsold, and Mrs Puttick proposed that these should properly be treated as "held on consignment" and the value credited to Colour Point (CB267). Mr Agostini told her that this would have the effect of reducing Pantone's sales in the first quarter, which cannot withstand a credit of this magnitude". He proposed either to agree "extended terms", or -

"if necessary, from your standpoint, Colour Point can book the credit and Pantone will not book the credit. I assume this is only an issue due to your local tax situation, let's discuss."

Mr Agostini did not recall whether the accounts were in fact manipulated in this way, or how otherwise the problem was resolved.

This incident well illustrates the ambivalent attitude of Pantone to Colour Point. On the one hand Mr Puttick was treated by Mr Agostini as in effect a "senior executive" of Pantone with whom Pantone's business problems could be freely discussed. On the other hand, sales to Colour Point were treated for accounting purposes, and presentation to third parties, as genuine sales, because (in Mr Agostini's words) "we were not associated legally".

(i) Colour Point becomes self-financing As already noted, by about April 1990 Colour Point had become self-financing. All the expenses, including Mr Puttick's consultancy fees, were paid out of the Colour Point account. Also, in January 1990, for the first time, amounts paid in respect of UK tax were charged to the Colour Point account (WE4/264). In spite of requests from Mrs Puttick (see eg.CB248), there were no further cash transfers or set-offs from Pantone in respect of extraordinary items after January 1990. In April, Mr Agostini noted that as at February 1990 there were unreimbursed extraordinary items" to the value of £130,220 (D2/H/2); but nothing was done to reimburse them.

(ii) The 1990 Report Some time during 1990, Mr Puttick submitted proposals in a report to Pantone entitled "Pantone European Operations: Review of Performance 1986-89 - Development Options for the Future". This provides a useful picture of the history of Mr Puttick's activities. Of the original consultancy agreement, he said this (CB195):-

"The operation began as a classic one-man show. The relationship between Pantone and Puttick was formalised as a consultancy agreement. Unlike conventional consultancies, Puttick was fully integrated in to Pantone's management structure and worked full time on Pantone's requirements. In order to make this arrangement work effectively, Pantone provided Puttick with the authority to make decisions on its behalf. This arrangement has worked with almost spectacular success, largely because of complete trust on both sides."

Of the "Colour Point concept" (CB198), he said:-

"Colour Point was not part of the original plan for a European representation, although, today, it is an important element in the overall, business strategy. Colour Point was a trade name, established by Puttick, to provide a separate distribution channel to the market... The Colour Point concept was never part of the original European Operation agreed between Puttick and Pantone, so it has always been an extra-mural activity. This changed in January 1988 when Anne Puttick joined the European team, part-time, and was paid directly, from Colour Point revenues.

The balance of Colour Point revenues are used to fund Pantone's European Marketing expenses and the vast majority of Pantone's need are met by Colour Point..."

Later he suggests that in 1989 the "European Operation can be said to have come of age" (CB208), and that -

"Today Colour Point funds virtually all European marketing expenses in the form of design, collateral, advertising and exhibition costs. The sales revenues are also used to fund the running costs of the European office." (CB209).

Under "Development Options for the Future", he emphasised the costs and complications which would be involved in setting up a subsidiary company in the UK (CB219). There is an important paragraph (CB224) dealing with "Financial Liability":-

"Legally speaking Colour Point is a trading partnership of Anne and Gerry Puttick, as is Puttick and Associates. Both operations regularly undertake commitments on behalf of Pantone and these can exceed $250,000 at any given time. Strictly, both Puttick and his wife are legally responsible for the commitments they make, even though they are on behalf of Pantone. Whilst these commitments remained small, this presented no practical problem, but now the exposures are significant, although we accept that for all practical purposes, there is no real problem. Nevertheless, the fundamental question that must be addressed is whether or not it is appropriate for a paid consultancy to take on financial commitments on behalf of Pantone..."

Mr Puttick proposed an "Alternative Expansion Option" of "cutting Colour Point loose" (CB226), which:-

"... would involve Puttick in taking over total responsibility for premises, operating costs, staff and commercial risks."

The report concluded:-

"If maximising growth and control is Pantone's primary objective, the best decision is to form a UK corporation. However, if Pantone wishes to minimise investment and maximise profit, having an independent Pantone Europe is the option to choose." (CB230)

(iii) Pantone's response It is not clear when this report, or the proposal to "cut loose", came to the attention of Mr. Herbert; but, in any event, there was no immediate response. During 1990, as already noted, Pantone had other problems. Mr. Herbert seems to have been first alerted to the significance of the Colour Point operation when he saw the figures for 1990, which showed total earnings of £277,060.17 (WB4/385); he wondered what had happened to the money. He was assured by Mr. Guidice that Mr. Puttick was "as clean as a whistle". He instructed Mr. Agostini to carry out an audit of the Colour Point books. However, this did not happen at this time, because of pressures on Mr. Agostini relating to Pantone's other financial problems.

In January 1991, Mr. Puttick came back to his theme, in a note to Mr. Guidice (CB264), in which he proposed various changes, including "switching all European based customers to buying through Pantone's European Operation", and a change of titles within the European team. He proposed to take the title Vice-President, European Operations (with suitable equivalents for his wife, and Mr. Kenworthy). As he said:-

"As Pantone's European Operation, we are perceived to be a Pantone subsidiary, rather than business consultants retained by Pantone. As a consequence, the title we use, European business consultant, is inappropriate."

In the meantime, it appears, Mr Agostini was concerned about the presentation of Colour Point's status. In a note in October 1990 (CB261) to Mr Guidice he proposed:-

"In the light of the possible tax consequences resulting from Colour Point continuing to pay for Pantone advertising and promotion, I recommend that we immediately instruct Colour Point to bill Pantone for all expenses paid on Pantone's behalf.

Benefits

1. All surplus cash should be forwarded to Pantone (pound account in UK), thereby reducing Colour Point's debt to Pantone. This helps establish the validity of the debt on Colour Point's books.

2. Pantone pays for all advertising and promotional costs in Europe from its pound account in Nat West (UK). Naturally we should trim costs wherever possible."

In a note to the Putticks dated 24 January (CB268), he notified them of the end of the arrangements for "extraordinary items":-

"The statement of earnings should include all expenses (there will be no extraordinary items). Cash flow should also not have any extraordinary items. Monthly financial statements should be compared against budget..."

At the same time, the note indicated that a credit of $100,000 had been approved in the Pantone 1991 budget. According to Mr Puttick, credits of $100,000 was made available in both 1991 and 1992, and were paid in instalments, the first $50,000 being made available in July 1991 . The precise purpose of these payments is not wholly clear from the documents. In Mr Agostini's note, the reference is to a credit of $100,000 for "Pantone Formula Guide 1,000 Promotion." However, invoices were sent by Mrs Puttick (see CB291-3), where the payments were described as "the first six months for serving the accounts of Letraset and Mode... Information". As I understood Mr Puttick, these all related to the same payments, which were part of the package of measures agreed at the beginning of 1991.

At about the same time, European customers were informed by Pantone that the "UK distribution service" would be renamed "Pantone Europe", and that -

"With the growth of the UK distribution operation, we have invested substantially in stock, improved distribution services, staff and warehousing to such an extent that we now wish all our European Licensees and Distributors to purchase from Pantone Europe." (CB271 - letter dated 12/2/91, signed by Mr. Guidice)

Use of the name "Pantone Europe" by Puttick Associates was formally confirmed in September (CB106).

(iv) Financial reporting In spite of the changes, detailed monthly reports continued to be sent to Pantone, and Pantone's approval was sought to the treatment for expenses. For example, in July 1991, Mr. Puttick sought a decision as to whether the cost of office improvements should be met out of cash flow or by a loan (CB285). Mr. Puttick continued to emphasise the advantage to Pantone of having its European marketing expenses provided for (see for example CB297A).

In October 1991, Mr. Puttick prepared a "Pantone Europe 1992 Business Plan". This is of significance mainly for the fact that the fictitious agents were given names for the first time. Paragraph 5.2 stated:

"Much of our sales success in getting Ink Licensees to purchase greater numbers of Formula Guides can be attributed to the use of our commission representatives. In 1992 I plan to continue to use the two groups we have:-

T. Walley Associates

DF Designs"

These forged documents were disclosed by Mr Kenworthy in October 1992. The number of such forgeries is unclear. However, It appears that they all date from the period immediately before the audit. As a result of the calculations made by Mrs Puttick, the actual amount of money dishonestly diverted to Mr Puttick has been agreed.

(iii) The audit I heard extensive evidence as to the progress of this audit, which took place between 7th and 9 July. However, the detail does not seem important. What emerged appears clearly from the report written by Mr Cohen immediately afterwards (CB356-371 ). He noted that the commission payments seemed "extraordinarily high" compared with his understanding of what the agents were doing (CB358), but he did not realise that they were fictitious. He put the problems down to poor accounting rather than dishonesty.

The parties sought the assistance of Mr Poole, the accountant. His contemporaneous note accurately summarises the respective positions:-

"The purpose of the meeting was to discuss Mr.& Mrs Puttick's business relationship with Pantone. I stated that to the best of my knowledge Mr. & Mrs. Puttick were in self employed partnership purchasing goods from Pantone as a customer and distributing them to various customers throughout Europe as suppliers on a normal commercial basis.

It would appear that Pantone Inc., while showing the same position through their financial records, considered that in some way part of the profits made by the Putticks belonged to Pantone, particularly in the recent period when turnover had increased significantly.

While Mr. & Mrs. Puttick do not necessarily accept Pantone's suggestions they realise they are dependent upon Pantone for the operation of their business and therefore wish to come to some agreement with them to clear any amounts considered to be owed to date and to establish a normal trading relationship for the future."

Mr Poole was understandably disturbed by what he heard. He had regarded the Pantone Europe business as simply a part of a single business being carried on by Puttick Associates, and had so treated it in his dealings with the Inland Revenue. However, after discussions with the Putticks, he attempted what he later described (2 Affidavit para.10) as "a hypothetical and artificial exercise" to identify the business profits and tax liability attributable to Pantone Europe (as distinct from the Putticks in their own right) in their accounting years to April 1988, 1989, and 1990 (which formed the basis of tax assessments for 1989/90 to 1991/2). He noted that, if there was to be an adjustment, it would probably be made by way of an additional invoicing for "goods apparently previously supplied at less than normal value", but that "this was yet to be decided". He also advised the Putticks of the serious tax implications of a change to operating as a branch of Pantone. His allocations were given to them in a letter dated 16 July (passed on to Mr Cohen).

The figures provided by Mr Poole were incorporated into Mr Cohen's report. Like Mr Poole, he was very uncomfortable with the existing structure, which he described in evidence as "sloppy" and having "potential for conflicts all over the place. He agreed with Mr. Poole that there was a need for "some formalised structure which would protect both the Puttick family and Pantone from Inland Revenue attack" (CB360).

Mrs Puttick was asked to recast her figures on a "cash-accounting basis", in a manner directed by Mr Agostini, to show the cumulative profits up to 30 June 1992. She did the exercise (CB384A), although she did not agree with the basis proposed. The resulting figure for total profit was £128,113, which was also adopted in Mr Cohen's report (CB368).

(iv) Reactions to the audit - July to October Following Mr Cohen's report, Mr Puttick and Mr Guidice discussed the position by telephone. It was agreed that Mr Puttick should write a "letter of abject apology". This duly followed on 27 July (CB372). In it, Mr Puttick confessed to having acted "foolishly and arrogantly". He identified "four major areas" where corrective action need to be taken. The first related to better control of the "Commission Representatives". He maintained the fiction that they existed, and indeed that they had been beneficial to sales. Secondly, he apologised for having paid himself a higher salary than had been authorised. Thirdly, in relation to "Taxation", he recognised that:-

"the exercise conducted by my accountant ... shows that we have placed too much of the tax burden on Pantone ..."

He left it to Mr. Cohen and Mr. Agostini to decide on the extent of the overpayment, and would "reimburse Pantone Europe at your direction." The final matter was the improvement of "management accounting."

The "Commission Representatives" featured again in a note to Mr Guidice on 27 July (CB377), in which Mr Puttick claimed to have "spoken to both groups and ... alerted them to your concerns". He proposed to introduce a "call report form" that would be submitted each month, giving details of visits and action; and he claimed to have arranged a meeting with "Tim Walley and Simon Frank" for 25 August. This note again was a fiction, to which Mr Guidice was a party. It was presumably intended to impress others within Pantone that remedial action was being taken.

On 17 August Mr Puttick went to the America. He met Mr Guidice, Mr Agostini, and Mr Cohen on the 21st. At this stage Mr Guidice was pressing for Mr Puttick to be given the status of an independent master-distributor. Mr Agostini also took the view that this would be the best solution, once the accounts had been sorted out. It seems that the essential items of a possible agreement were worked out, although Mr Herbert does not appear to have been directly involved at this stage.

Later in the month Mr Guidice visited England. With him, Mr Puttick prepared a draft letter setting out proposed terms (CB380). Among these was a proposal that £60,000 should be paid to Pantone in respect of "profits". This was derived from the figure of £128,113 calculated by Mrs Puttick, with a deduction for expenses and UK tax which would be payable on that amount. The letter was not signed, but was taken back to America by Mr Guidice for consideration. Mr Herbert did not in fact see this letter, and the suggestions in it were overtaken by the discovery of the fraud.

(v) Termination The fraud was revealed in the second week of October, when Mr Kenworthy came to Pantone with copies of the Putticks' bank statements, and of forged invoices. Mr Guidice was dismissed. He reached an agreement with Pantone, under which he agreed to repay some £79,000 received by way of commission. About 22 October, Mr Puttick was visited in England by Pantone's lawyers, and confronted with the evidence; and the relationship was summarily ended. The present proceedings followed.

Arrangements were made to secure the amounts outstanding in the Pantone Europe account, and to pay outstanding bills. There is a Mareva injunction in force. I have not so far been concerned in the details of these arrangements. They will no doubt require to be reconsidered in the light of my judgment.

Mr Willer puts his case under four alternative heads, which he summarises as:-

(i) Breach of contract

(ii) Secret profits

(iii) Deceit

(iv) Unjust enrichment

He does not seek to draw any clear distinction between the different heads so far as the figures are concerned. The items of claim (following amendments allowed by leave at the hearing) are: -

Balance of price of goods delivered $397,617.65

Payments to fictitious sales force £208,568.43

Inflated payments to Ford Communications £28,940

Profit not remitted £60,000

Inflated payments to Kenworthy £8,915

Overpaid consultancy fee for 1992 £2,159.94

(In an Appendix to this judgment I give the derivation of these figures, and compare them to the figures in the Statement of Claim.)

In the Amended Defence and Counterclaim, dated 26 May 1993 (at a time when the Putticks were legally represented), there was pleaded a counterclaim based on alleged breach of contract by Pantone. It included a claim for "approximately £146,000", in respect of "consultancy expenses paid by the Defendants for which no payment was made by the Plaintiff". This was intended to represent the unreimbursed balance of "extraordinary items" up to April 1990. They were calculated by Mrs Puttick in a Table prepared in late 1992, which became Exhibit FAF4 to Mr Falk's second affidavit. (The significance of the April 1990 date was that this was the date of an internal note in Pantone's files which appeared to acknowledge the right to reimbursement.)

The Counterclaim was dismissed by consent on 27 July 1994 (before Deputy Judge Robert Reid QC). However, before me, Mr Puttick sought leave to reinstate the claim, by way of set-off rather than counterclaim. He also sought to carry the calculation forward to December 1990, relying on a further internal note. By this time the figure had reached over £350,000.

I did not permit this amendment. The decision to consent to dismissal had been a considered one, made with legal advice. Mr Puttick said that his lawyers had told him that it did not preclude a set-off; but there was no written evidence of this, and no reservation had been made in inter-solicitor correspondence. The Plaintiffs had no warning that the matter was to be raised again, and consequently had not called evidence to deal with it. Furthermore, by the time the point was specifically raised by Mr Puttick, Mr Agostini (who would have been the most relevant Pantone witness) had completed his evidence and returned to the United States.

It also appeared to me that the point had very little merit. The agreement between the parties gave the Putticks no automatic right to reimbursement of any particular expenses paid out of the Pantone Europe account. The "extraordinary item" concept recognised that some of the expenditure was fairly attributable to head office; but reimbursement was always dependent on the specific approval of Mr Agostini. Internal notes which were never seen by the Putticks, and were never acted upon, do not establish a contractual basis for set-off. Furthermore, the earlier arrangements were superseded at the beginning of 1991, after which extraordinary items were no longer allowed, and a credit was given against future purchases. If the Putticks had thought they had some outstanding claim, I cannot believe that they would not have raised it at that time.

The facts are complex. However, once they are understood, the legal consequences can in my view be stated relatively briefly. I shall deal with them under the alternative heads identified by Mr Willer.

(i) Breach of contract

There is no dispute that the defendants are liable to pay the outstanding balance in respect of goods supplied, and there is no dispute as to the figure.

There can equally be no dispute that dishonest fabrication of commission payments and other matters constituted a serious breach of the contractual relationship (whatever its precise nature) justifying immediate termination. However, there are no separately particularised heads of damage in respect of this breach. It raises similar issues to those to be considered under "deceit" (see below).

I find much more difficulty with the broader contractual basis on which Mr Willer puts his claim to profits earned in the name of Colour Point or Pantone Europe. The claim is put at £60,000, on the basis that this was the figure accepted by Mr Puttick in his draft letter of 28 August. It is to be noted that the calculation of this figure assumes that UK tax on the profit will be payable by the Putticks - an assumption which itself stands oddly with the claim that these are Pantone profits.

In his written submission, Mr Willer argues that:-

" ... the documentation was indeed 'cosmetic'. It is formally admitted by the Plaintiff that the Defendants were treated in their books of account and records as debtors in accordance with the Distributorship Agreements and further that the Plaintiff's books and records do not individually identify purchases from the Defendants. To the outside world, in accordance with Mr. Puttick's original request, he and later Colour Point/Pantone Europe, might appear unconnected with the Plaintiff. The reality was quite otherwise. The Defendants were at all times seen as a department or profit centre within Pantone..."

(The reference to a "formal admission" is to one recorded in the Order of 27 July 1994.)

I cannot accept this approach. If the parties choose, for reasons related to presentation to the tax authorities or other third parties, to adopt arrangements in a particular form, they must accept the consequences. They should not be surprised if they later find themselves hoist with their own petard in their dealings with each other.

In any event, this submission does not, in my view do justice to the understanding and experience of Pantone's advisers. On any view, the relationship between Pantone and the Putticks was an unusual one. It started from Pantone's desire to have the benefits of a presence in the UK without the complications of direct responsibility. The distributorship evolved from that. There is no evidence that the decision to approve a distributor agreement was the consequence of the corruption of Mr Guidice, and Mr Willer did not so submit. It was clearly a considered arrangement, which was approved by Mr Herbert, and went through Pantone's normal administrative channels. It accorded with Mr Herbert's desire to have, in effect, the best of both worlds, and particularly his desire to be able to cut off Mr Puttick if there were problems with Letraset.

Mr Willer relied on the documents at CB50,51 and 70 (which I have reviewed above). I accept that these can be regarded as part of the contractual documents, since they recorded agreements made between the parties by way of variation or clarification of the principal document. However, they do not change the position. On the contrary, Mr Agostini's note of 25 February 1988 (CB70) confirms the basic nature of the relationship.

Mr Herbert may have wished to have the best of both worlds. But he and his advisers knew that he could only do so within the constraints allowed by the tax and other relevant laws of the two jurisdictions. Mr Agostini knew that any direct claim by Pantone to an interest in the Pantone Europe account or the profits of its business would be incompatible with those constraints. That was why he proposed the mechanism of a "management fee".

Had that mechanism ever been used, difficult questions might have arisen as to the extent to which the Court should give effect to it - at least in so far as the fee could be shown to exceed a reasonable allowance for management services actually rendered. I drew Mr WilIer's attention to Re Emery's Trusts [1959] Ch. 410 where a party sought to contradict the terms of a trust, on the basis that it was set up in that way solely for tax purposes, and did not reflect the reality; this was not permitted. Although this case concerned the presumption of advancement, it was recently cited by Lord Browne-Wilkinson (Tinsley v. Milligan [1993] 3 WLR 126 at 151) as an example of the general proposition that a part cannot rely on his own illegality to establish a claim (whether at law or in equity).

Mr Willer's submissions seemed to fall foul of this principle. If he was correct that the money earned in Europe was really Pantone's money, then Pantone should have declared the true position and accounted for their earnings. (Mr Poole had spelt out the legal position in his original letter.) Similarly, I do not think the Court can give effect to a case based on the proposition that the management fee was no more than an artificial device or "facade", designed to conceal the true position from the tax authorities. Indeed I doubt very much whether Mr Herbert, on reflection, would wish to be party to such an argument. He assured me, and I accept, that it was his intention to fulfil all proper legal obligations in both countries.

Mr Willer referred to the extent of supervision exercised in practice by Pantone, and the detailed financial reporting that was required. These he said were incompatible with a truly independent distributorship. In his submission, the Putticks acted as agents for Pantone in relation to any sales. Against this, Mr Puttick relied on the clear terms of the agreements. He also noted the lack of any direct control by Pantone over the Pantone Europe account, and the freedom allowed to the Putticks in relating to pricing. Both parties sought to draw comfort from comparison with Pantone Asia and Mode Information.

I did not find these submissions or comparisons helpful. In deciding the nature of the contractual relationship, I must start from the contractual documents agreed between the parties. There is nothing in the agreements which gives Pantone any right to Pantone Europe profits. The distributor agreements are in a standard form which allows the distributor to trade on his own account. In the Memorandum of February 1988, Mr Agostini clearly defined the two financial obligations of the Putticks: to pay for goods supplied and to pay the management fee. The former is not in issue. The latter was never exercised. There is no evidence of a demand for a management fee, nor any specific evidence of services which would have supported it. Even in 1992, when the repatriation of profits was being discussed, the mechanism suggested was not a management fee, but an invoice for goods supplied.

I have already commented on the references in the Puttick correspondence which appear to imply a readiness to account for profits. Whatever the Putticks thought might happen, the agreement made by them with Pantone, and the tax and other arrangements made by them with the UK authorities, were wholly inconsistent with any direct claim by Pantone. I accordingly reject the claim for Pantone Europe profits, so far as it is based on an alleged contractual right.

(ii) Secret profits

Mr Willer relies on the fundamental principle that a person in a fiduciary position is accountable to his principal for any secret profit. One of the clearest, and most frequently cited, judicial statements of this principle is in Parker v. McKenna (1874) 10 Ch 96, where James LJ said (p 96):-

"I do not think it is necessary, but it appears to me very important, that we should concur in laying down again and again the general principle that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the consent of his principal; that rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent..."

The generality of this principle has been frequently confirmed in the House of Lords. Thus, in Phipps v. Boardman [1967] 2 AC 46 at 123, Lord Upjohn adopted the following statements of the rule first by Lord Heschell:-

"It is an inflexible rule of a court of equity that a person in a fiduciary position ... is not, unless otherwise provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict..." (Bray v. Ford [1896] AC 44, 51)

and secondly by Lord Cranworth:

" ... it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect" (Aberdeen Ry. v. Blaikie (1854) 1 Macq. 461, 471).

Lord Upjohn observed that this principle:-

" ... is applicable, like so many equitable principles which may affect a conscience, however innocent, to such a diversity of different cases that the observations of judges and even in your Lordship's House in cases where this great principle is being applied must be regarded as applicable only to the particular facts of the particular case in question and not regarded as a new and slightly different formulation of the legal principle so well settled."

As Sir Peter Millett has observed ("Bribes and Secret Commissions", [1993] Restitution Law Review pp. 16 -17). "The object of the law is not compensatory. The principal is not given a remedy in order to compensate him for loss; he is entitled to recover whether or not he has suffered loss. The rule is laid down 'pour encourager les autres'".

In my view, this principle is directly applicable to this case. Mr Puttick was not simply a Pantone distributor. He was also a business consultant. As he himself said (in his 1990 report), the relationship had worked "largely because of complete trust on both sides." Although Pantone had no direct claim to the Colour Point or Pantone Europe accounts, I have no doubt that the management of those accounts was sufficiently closely associated with the fiduciary relationship to be within the rule.

It follows that the Putticks were not entitled to derive any profits from that relationship, other than as authorised by their agreement with Pantone.

Mr Puttick's only real answer is to argue that, since the money in the Pantone Europe account represented his profits under the distributor agreement, he was paying himself out of his own money. However, this misses the point of the principle. As the above citations show, it does not depend on where the money comes from, or whether the principal makes a loss. What matters is whether the profit is derived from the relationship. If so, it belongs in equity to the principal, except so far as he has authorised the agent to retain it. Whatever view is taken of the contractual relationship between Pantone and the Putticks, it did not authorise them to divert money to themselves by way of fictitious commissions. The fact that he might have secured the same profit by a different, authorised route, is immaterial.

This principle, in my view, entitles Pantone to judgment, not only for the commission taken by Mr Puttick, but also to the "profit-margin" on the payments received by him for Mr Kenworthy and Ford Communications. Although Pantone authorised the payments, they authorised them as payments for the agents, not for Mr Puttick. They were not informed of the "profit-margin".

Pantone also claimed an additional sum (£4,085.60) which was said to represent the difference between the amount repaid by Mr Guidice, and that which they had calculated as paid to him by reference to Mr Poole's work papers. The reason for this apparent discrepancy was not clear, although Mrs Puttick thought that it might be related to some travellers cheques which were made available to Mr Guidice. I do not regard this claim as sufficiently established by the evidence. I am doubtful, in any event, whether these can be regarded as profits for which Mr Puttick (as opposed to Mr Guidice) can be held accountable.

There is also a small claim for £2,159.94, which is an overpayment of the consultancy fee. This, although I think not dishonest, was admittedly unauthorised (Mr Puttick's letter of 27.7.92). It therefore falls within the same rule.

(iii) Deceit

The false statements in relation to the fictitious commissions (continued over a period of some six years) could be seen as foundation of a claim, not only for breach of contract, but also for the tort of deceit. Although it is not pleaded in this form, I have considered whether the claim for profits could be justified, in whole or in part, on this basis. The argument would be that the fraudulent diversion of funds misled Pantone as the level of the earnings in Europe. Had they been aware of the true position, it might be said, they would have moved more quickly to assert their alleged rights, and secure any amendments needed to protect them.

I find this difficult to evaluate. It is particularly difficult to assess the extent to which the corruption of Mr Guidice delayed effective action by Pantone. However, it is notable that, even when Mr Herbert's attention was drawn to the level of profits at the end of 1990, it took another year and a half before the audit took place. This was partly because attention was directed to other problems. But it was also convenient for Mr Herbert to have the European expenses met out of Pantone Europe's funds. Pantone was also benefiting from the growth in sales in Europe. Even its master-distributor prices gave a substantial profit margin.

Overall, it seems to me that loss under this head is speculative. In so far as there was a loss, it is adequately compensated by the recoupment of the secret profits which I have already allowed.

(iv) Unjust enrichment

This I understood to be intended as a reference to some more general restitutionary claim to moneys in the Pantone Europe account, which could loosely be said to have been operated "on behalf of" Pantone. However, as with the contractual claim, this involves the assertion by Pantone of a direct beneficial interest in the account, which is wholly inconsistent with the arrangements adopted, and their tax treatment. It is the "agency" argument under another guise. I reject it.

Mr Willer also referred me to the "jurisdiction in equity to grant relief in cases of fraud" (Goff and Jones' Law of Restitution 4^th ed. p. 511). Whatever the precise nature of this jurisdiction, I think equity is satisfied by the remedy in respect of secret profits which I have already allowed.

It follows that the plaintiff is entitled to judgment for the following amounts under the Statement of Claim:-

Paragraph 9 $397,617.65

Paragraph 5(a) £204,482.83

Paragraph 5(b) £28,940.00

Paragraph 5(e) £8,915.00

Other £2,159.94

I will hear the parties on any consequential matters.