Bim Kemi v Blackburn Chemicals Ltd

INTRODUCTION

The issue on this appeal raises the question of the degree of connection which must be shown between (1) a claim for unliquidated damages for breach of a contract and (2) a cross-claim for unliquidated damages for breach of a different contract between the same parties, in order to permit the latter claim to be the subject of an equitable set-off against the former claim. The issue is of particular importance in this case because the second contract contains an arbitration clause.

Claim (1), brought by the claimant ("Bim Kemi") is a claim for damages for the alleged repudiation by the defendant ("Blackburn") of an exclusive distribution agreement which Bim Kemi allege, but Blackburn deny, was made in 1994 ("the 1994 agreement"). At that time the parties were already in a long-standing trading relationship pursuant to a technology and trademark licensing agreement made in 1984 ("the 1984 agreement"), which contained an arbitration clause. Claim (1) is for damages in respect of Blackburn's refusal to supply Bim Kemi with the products which were the subject of the 1994 agreement, Bim Kemi claiming damages in respect of its loss of profit during the period of notice provided for. The proceedings were commenced in the Commercial Court by writ dated 23 ^rd April 1999. Claim (2), which Blackburn seeks to set-off against Bim Kemi's claim for damages, is a cross-claim for damages in respect of, so far unparticularised, financial loss resulting from Bim Kemi's alleged breaches of various terms of the 1984 agreement, which terminated in May 1999. Blackburn's pleaded counterclaim in respect of those losses has been stayed under s.9 of the Arbitration Act 1996.

THE BACKGROUND FACTS

Blackburn is an English company which makes and supplies chemicals, including anti-foaming agents, to paper manufacturers. Bim Kemi is Swedish corporation which also makes and supplies chemicals, principally to the paper industry in Sweden. By the 1984 agreement, Blackburn granted a licence to Bim Kemi to use its know-how in anti-foaming agents and to permit Bim Kemi to process concentrate made by Blackburn, selling on the anti-foaming agents which Bim Kemi produced under Blackburn's trademark. The 1984 agreement was for a period of 10 years, terminable thereafter by either side giving 24 months' notice to the other. The parties worked happily together for a number of years, Blackburn supplying Bim Kemi with concentrates to enable it to make products at its Swedish plants in return for 5% of net sales revenue. The parties implemented the terms of the 1984 agreement and Blackburn duly supplied concentrates under it until notice of termination by Blackburn took effect in May 1999.

In 1993 there were negotiations between the parties relating to new Blackburn products which were not the subject of the 1984 agreement and which Bim Kemi wished to purchase in their finished form for re-sale in Scandinavia. Following a meeting on 25 ^th November 1993 Blackburn sent a fax to Bim Kemi dated 20 ^th December 1993, which Bim Kemi say evidenced a new distribution agreement in relation to the new products. The fax was not the subject of a reply in writing; however, Bim Kemi rely on the conversation surrounding it and later communications between the parties as containing or evidencing a completed agreement in terms of the fax. It is Bim Kemi's case that the 1994 agreement took effect from 1 ^st January 1994 and gave them exclusive sales rights in Sweden for Blackburn's product called Dispelair BS 469 and subsequent developments of such product, in particular Dispelair BS 470: that Bim Kemi were to have exclusive sales rights in Denmark, Norway and Finland for three years, which would continue if Bim Kemi attained 20% of the available market in any product range; and that the gross profit on the sale of products manufactured by Blackburn and sold by Bim Kemi would be split between the parties. The parties were to supply each other with all reasonable and relevant commercial information and the agreement would be terminated by either party giving 12 months' notice to the other from 1 ^st January. Unlike the 1984 agreement, which related to sales made by Bim Kemi of anti-foaming agents produced by Bim Kemi from Blackburn's concentrate ("old products"), the 1994 agreement was simply one for distribution by Bim Kemi of Blackburn's own product ("new products").

In January 1995, Bim Kemi purchased a Finnish company, Cellkem, which made products, some of which competed with the old products licensed by Blackburn to Bim Kemi. In February 1995, following Blackburn's expression of concern, Blackburn recorded an assurance made by Bim Kemi that it intended to replace Cellkem's competing products known as "Tensidef" with Blackburn's Dispelair range. Whatever the contractual arrangements, the evidence is that, from 1994 onwards, as between the parties the arrangements for both the old and new products were treated commercially and in accounting terms as part of a single trading relationship.

Disharmony occurred in 1998. It is Bim Kemi's case that there was an implied term of the 1994 agreement that Blackburn would supply all Bim Kemi's reasonable requirements for Dispelair BS 469 and subsequent products and that they did so between 1994 and 1998, Bim Kemi in fact enjoying exclusivity in Denmark, Norway and Finland, in particular with Dispelair BS 470. In December 1998, Blackburn appointed new distributors in Sweden and Finland for BS 470 and refused to supply Bim Kemi with its requirements for that product in those countries. Bim Kemi relied upon that conduct as a repudiation of the 1994 agreement, claiming damages for loss of profit put at SEK 14,000,000.

Blackburn's principal defence in the proceedings is that they deny the existence of the 1994 agreement. They agree that they supplied new products, and in particular BS 470, as and when they received orders but deny that Bim Kemi was an exclusive distributor in Sweden, Finland, Denmark or Norway. Alternatively, they allege that, if there was a binding 1994 agreement, it was repudiated by Bim Kemi's conduct in breach of such agreement in failing to inform Blackburn of its sales of BS 470, in failing to include Dispelair in its sales brochures, and in making or obtaining Tensidef anti-foaming agents for supply to customers in Sweden, Finland, Denmark and Norway instead of Blackburn's products. They also allege failure to supply information relating to Tensidef agents. In September 1998 Bim Kemi cancelled three large orders for BS 470 and it is Blackburn's case that that occurred because Bim Kemi was selling the competing product Tensidef, and had placed orders with Blackburn only as 'backup', which were then cancelled. Blackburn say they were entitled to decline to make further supplies of BS 470, although remaining willing to supply other products on an order by order basis (as they have continued to do).

It is also Blackburn's case, however, that, if Bim Kemi is entitled to claim damages for breach of the 1994 agreement, Blackburn is in any event entitled to set off damage and loss caused by Bim Kemi's breach of the 1984 agreement. It is alleged that in the course of favouring and developing Tensidef products at the expense of Blackburn's Dispelair range over the years since its acquisition of Cellkem, Bim Kemi breached the 1984 agreement by

i) failing to use best endeavours to stimulate sales by not including Dispelair products in its brochures and promoting sales of Tensidef products instead of Dispelair and publicising the trademark of Tensidef rather than that of Dispelair;

ii) producing Dispelair 150 and Tensidef anti-foaming agents otherwise than in accordance with the specifications laid down;

iii) failing to communicate improvements modifications or developments of licensed know-how and information about Tensidef products, the technical aspects of modifications to Dispelair 150 and economic information about its use after 1995;

iv) abusing Blackburn's rights in the trademark Dispelair by promoting and selling Tensidef products and offering Dispelair at reduced prices if customers were not satisfied with Tensidef.

THE PROCEDURAL HISTORY

On 13 ^th October 1999 Bim Kemi made application to stay the set-off and counterclaim based on alleged breaches of the 1984 agreement, on the ground that the arbitration clause in the 1984 agreement required disputes to be referred to arbitration before the ICC in Stockholm. However, that is not in itself a ground for staying the defence of set-off. As made clear by Hoffmann LJ in Aectra Refining and Marketing Inc. -v- Exmar NV)[1994] 1 WLR 1634, in the case of a "transaction set-off" of the type pleaded (to be contrasted with "independent set-off" as between cross-claims for due and payable liquidated sums):

"The authorities are in favour of allowing the set-off to be pleaded, notwithstanding its submission to arbitration or a different jurisdiction [1649F] … The Defendant is pleading a confession and avoidance to the Plaintiff's claim. He is saying that although the facts alleged by the...