Fearns v Anglo Dutch Paint & Chemical Company and Others
| Jurisdiction | England & Wales |
| Judgment Date | 23 September 2010 |
| Neutral Citation | [2010] EWHC 2366 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC05C01961 |
| Date | 23 September 2010 |
[2010] EWHC 2366 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(INTELLECTUAL PROPERTY)
Before: Mr. G. Leggatt Q.C. Sitting as a Deputy Judge of the Chancery Division
Case No: HC05C01961
Alastair Wilson Q.C. and Giles Fernando (instructed by Bevans Solicitors) for the Claimant
Thomas Moody-Stuart (instructed by Faegre & Benson) for the Defendants
Hearing date: 28 July 2010
Mr G. Leggatt Q.C.:
In my judgment given on 2 July 2010 on the enquiry held in this case, I left over for further argument the question of the date at which the damages payable (in sterling) to the Claimant, Mr Gary Fearns, and the debt payable (in euros) by Mr Fearns to the First Defendant (“De Beer”) should be converted into a common currency and set off against each other to derive a net liability. I found that question difficult as well as being one on which, perhaps surprisingly, there appears to be little direct authority.
I heard argument on this question, and on other matters consequential on my judgment, on 28 July 2010. On that date I made an order determining the net sum due on the enquiry but indicated that I would give my reasons for my decision on the set-off point in writing later. In this judgment I give those reasons and also the reasons for my decision on a further question of set-off (between damages and costs) which I was asked to deal with after the hearing on 28 July on the basis of written submissions.
Amounts of Claim and Counterclaim
In accordance with my earlier judgment I assessed the damages payable to Mr Fearns as compensation for the Defendants’ infringement of his Autopaint trade mark and passing off in the principal sum of £438,569. This sum comprises £162,679 in respect of profits lost in the period up to the end of June 2005 as a result of unlicensed sales made by the Second Defendant (“Anglo Dutch”) to franchisees and £275,890 in respect of profits lost in the period from the end of June to the end of December 2005 as a result of the loss of the Autopaint franchisee network.
I assessed the debt owed by Mr Fearns to De Beer in the principal sum of €594,696. This sum represents €627,229 due in respect of goods sold to Mr Fearns in the UK (after giving credit for licensed sales made to franchisees) less €26,521 due to Mr Fearns under the Australia agreement and €6,012 due under the Malta agreement.
The Date of Set-Off Issue
It was common ground between the parties that the damages awarded to Mr Fearns and his debt to De Beer should be set off against each other and judgment given for a single net sum. There was a dispute, however, as to the date at which the amounts of the claim and counterclaim should be converted into a common currency. Counsel for Mr Fearns contended that part of his claim should be converted at the rate applicable in 2005, when the claim arose. The Defendants contended that the relevant date was the date of judgment, i.e. 28 July 2010.
The date matters because the rate of exchange between sterling and the euro has altered significantly over the relevant period. In 2005, the rate of exchange was around £1: €1.45. Converted at that rate, the damages of £438,569 payable to Mr Fearns would be equivalent to €635,925 (that is, €41,229 more than the principal sum which he owed to De Beer). However, at the time of the hearing on 28 July 2010 the rate of exchange was around £1: €1.2. Converted at this rate, the damages would be equivalent to €526,283 (that is, €68,413 less than the principal sum owed to De Beer).
The primary argument advanced by Mr Wilson QC on behalf of Mr Fearns was that all the damages arising up to the end of June 2005 should be converted into euros and deducted from Mr Fearns’ debt to De Beer at the rate which prevailed at that time. Mr Wilson was not able to cite any case which establishes that this is the correct approach, but he argued that it follows from the fact that the two claims were subject to an equitable set-off. Mr Wilson submitted that the effect of an equitable set-off is to reduce pro tanto the amount owing to the other party. His primary submission, as I understood him, was that this effect is automatic, so that as and when Mr Fearns’ right to damages arose his liability to De Beer was reduced by the amount of the damages. Alternatively, Mr Wilson contended that the set-off took effect when it was pleaded as a defence to the Defendants’ counterclaim at the end of October 2005. In practical terms it would make no difference which of these dates was chosen as the exchange rate was around £1: €1.45 throughout 2005. In support of his argument (in its alternative formulation) Mr Wilson relied on a passage in Wood on Setoff and Netting, Derivatives and Clearing Systems (2007) at §3–040, which states: “Self-help multicurrency set-off is available if a market rate can be easily determined: the courts should allow a conversion at the time of the exercise of the set-off”.
On behalf of the Defendants, Mr Moody-Stuart did not dispute that there was an equitable set-off but denied that either the existence or the exercise of the set-off had the effect of extinguishing or reducing either party's liability to the other. He submitted that the correct approach is to calculate the total amount of each liability, including interest at a rate appropriate to the currency of the liability, at the date on which the court gives judgment; and then to convert the lesser sum into the currency of the greater at the exchange rate prevailing on that date and deduct it from the greater sum, giving judgment for the balance. In support of this contention, Mr Moody-Stuart relied on a line of Admiralty cases involving cross-claims arising out of collisions between ships where both were to blame, in which such an approach has been adopted.
Mr Wilson responded that these cases reflect a rule particular to Admiralty proceedings and are also difficult to reconcile with Smit v Selco [1988] 2 Lloyd's Rep 398, another Admiralty case which he argued supports his position.
I will come to the Admiralty cases, which are the only cases that counsel were able to find in which the appropriate date of conversion of cross-claims in different currencies has been discussed. But before doing so, I will address the question as a matter of principle by identifying the different types of set-off recognised in English law and considering the nature of equitable set-off, as Mr Wilson urged me to do.
Types of Set-off
The term “set-off” as it is used in English law has no uniform meaning and is therefore a ready source of confusion. In one sense it refers to a process by which one sum is netted off against another so as to leave only a single liability for the balance. But the term is also used to refer to rights which do not have this effect but which prevent a person in certain circumstances from enforcing a claim where there is a cross-claim against him while leaving both liabilities intact. Such rights, as I will indicate, can themselves differ in their nature.
Leaving aside rights of set-off which are created by contract and the mandatory set-off which occurs on bankruptcy or the winding-up of a company, there are two main types of set-off in English law. These are generally referred to, respectively, as ‘legal set-off’ and ‘equitable set-off’.
Legal Set-off
Legal set-off is a creation of statute. It originated in the Insolvent Debtors Relief Acts 1729 and 1735 which provided that where there were “mutual debts between the plaintiff and the defendant … one debt may be set against the other”. The rights conferred by those statutes have been continued in subsequent statutes and are now enshrined in section 49(2) of the Senior Courts Act 1981 and CPR r.16.6: see Re Kaupthing Singer & Friedlander [2009] 2 Lloyd's Rep 154, 156.
In Stein v Blake [1996] AC 243, 251C-D, Lord Hoffman said:
“Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject matter) to be tried together with the plaintiff's claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor's prison) before his cross-claim has been determined.”
The characterisation of legal set-off as procedural rather than substantive has at least three aspects. First, such a set-off can only be asserted in legal proceedings and not in any other context. Second, it only arises when pleaded as a defence. Third, it is clear that the assertion of a legal set-off does not extinguish either liability but leaves separate and distinct claims in existence until a judgment is given in which the claims are merged.
For a right of legal set-off to exist the claim and cross-claim need not be for debts strictly so-called, but they must be for sums which are due and which are either liquidated or capable of ascertainment without valuation or estimation at the time of pleading: see Axel Johnson AB v Mineral Group [1992] 1 WLR 270; Stein v Blake, supra, at 251F-G. In the present case neither the claim nor the counterclaim satisfied this test, and it was not suggested that the principle of legal set-off was...
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