BIM KEMI AB v. BLACKBURN CHEMICALS LTD. [2001] EWCA Civ 457

An equitable set-off is available where the cross-claim flows out of, and is inseparably connected with, the dealings and transactions giving rise to the claim. The claims need not arise under the same contract. The court should also consider whether it would be manifestly unjust to enforce the claim without taking account of the cross-claim.

An unliquidated cross-claim may be set off against an unliquidated claim. Different contracts within a continuing trading relationship may satisfy the required connection where they operate in parallel and the same conduct materially affects obligations under both. A trading relationship alone is insufficient.

Bim Kemi claimed damages for Blackburn’s alleged repudiation of a 1994 exclusive distribution agreement concerning finished anti-foaming products. Blackburn denied that agreement and alternatively alleged breaches by Bim Kemi. It also sought to set off damages arising from alleged breaches of a related 1984 technology and trade mark licensing agreement.

The 1984 agreement contained an arbitration clause. Blackburn’s counterclaim under it was stayed pursuant to section 9 of the Arbitration Act 1996, but the Deputy High Court Judge held that the cross-claim could remain as an equitable set-off. Bim Kemi appealed.

The central question was whether the dealings underlying claims arising under the two contracts were sufficiently and inseparably connected to permit equitable set-off.

1. Appeal dismissed unanimously. Potter LJ delivered the judgment, with which Jonathan Parker and Sedley LJJ agreed. The Deputy High Court Judge had correctly held that Blackburn’s alleged cross-claim under the 1984 agreement could, if established, operate as an equitable set-off against Bim Kemi’s damages claim under the alleged 1994 agreement.

2. An unliquidated cross-claim may be set off against an unliquidated primary claim. Hanak v Green was a sub silentio precedent for that proposition and was to be preferred to McCreagh v Judd. The equities favour allowing set-off at least as strongly where the primary claim remains unliquidated.

3. The preferred test was Lord Brandon’s formulation in Bank of Boston Connecticut v European Grain and Shipping. The cross-claim must flow out of, and be inseparably connected with, the dealings and transactions giving rise to the claim. The older language of “impeachment of title” was difficult to define and had been replaced or redefined by the modern test. The formulation in The Nanfri expressed substantially the same principle through close connection and manifest injustice.

4. The claim and cross-claim need not arise under the same contract. Different contracts made within a long-standing trading relationship can qualify, although the existence of that relationship alone is insufficient. The court should examine the substance of the dealings and whether it would be manifestly unjust to enforce one claim without taking the other into account.

5. The two agreements operated in parallel within a continuing relationship directed to developing the Scandinavian market for Blackburn’s anti-foaming products. The alleged promotion of competing Tensidef products affected obligations under both agreements. The 1994 agreement supplemented rather than replaced the 1984 agreement. The claims were therefore closely and inseparably connected.

6. Manifest injustice should receive separate consideration even after the required connection has been established. No additional circumstance, including the arbitration clause, the unliquidated and incompletely particularised nature of the claims, or the timing of Blackburn’s complaints, made recognition of the set-off unjust. Costs were awarded to Blackburn in the sum of £9,000.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously. The ruling that Blackburn’s cross-claim could be pleaded as an equitable set-off was affirmed.

2. High Court, Queen’s Bench Division, Commercial Court: David Mackie QC, sitting as a Deputy High Court Judge, stayed the counterclaim under the 1984 agreement but determined that the alleged liability could, if established, be set off against liability under the alleged 1994 agreement. Permission to appeal was granted.