Fearns (t/a "Autopaint International") v Anglo-Dutch Paint & Chemical Company Ltd & Ors

An equitable set-off prevents enforcement of connected cross-claims to the relevant extent, but neither its existence nor its exercise extinguishes or reduces either liability. Extinction requires agreement or a judgment after both liabilities have been established.

When judgment liabilities in different currencies are set off, interest is first calculated to the set-off date. The smaller amount is then converted into the currency of the larger at the exchange rate prevailing on that date, and judgment is entered for the balance.

The court has a broader discretion to set off judgment liabilities, including costs against damages, whenever justice requires it.

Following an enquiry into trade mark infringement and passing off, the court assessed sterling damages payable to the claimant and a euro-denominated debt payable by him to the first defendant. The parties agreed that the liabilities should be set off, but disputed the date for converting them into a common currency.

The claimant argued that equitable set-off had reduced or extinguished the liabilities when his damages claim arose or was pleaded in 2005. The defendants contended that conversion and set-off should occur when the liabilities were finally determined in July 2010.

The court also considered whether an interim costs payment owed by the insolvent claimant should be set off against the net damages balance.

1. The claimant’s proposed 2005 conversion date was rejected. Equitable set-off does not extinguish or reduce either cross-liability. It prevents a party from enforcing or relying on its claim to the relevant extent where the connection between the claims makes enforcement manifestly unjust. The liabilities remain in existence unless discharged by agreement or a judgment of the court.

2. Legal set-off is procedural. It permits due and sufficiently certain monetary cross-claims to be tried together, but leaves them distinct until judgment. Equitable set-off may operate outside proceedings where the cross-claim is advanced reasonably and in good faith and is so closely connected with the claim that enforcement without accounting for it would be manifestly unjust.

3. Under rule 40.13 of the Civil Procedure Rules and the court’s inherent jurisdiction, judgment liabilities may be netted by a discretionary order. Ordinarily, the effective date is when the existence and amount of both liabilities have been established by judgment or agreement.

4. For liabilities in different currencies, the court should calculate interest on each liability to the set-off date, convert the smaller amount into the currency of the larger at the exchange rate then prevailing, and order payment of the balance. Applying that method on 28 July 2010 produced a balance of £36,832.72 payable to the claimant.

5. A currency loss caused by the delay between accrual and payment may in principle be recoverable as damages, subject to ordinary requirements such as causation and remoteness. The claimant failed on the facts because he would not have used the lost profits to reduce the euro debt.

6. The court possessed a broader discretionary jurisdiction to set off judgment liabilities for damages or costs when justice required it. The claimant’s £300,000 interim costs liability was therefore set off against the damages balance. Allowing the insolvent claimant or his creditors to receive the damages without accounting for the costs incurred in obtaining them would have been manifestly unjust.

This was a first-instance supplementary judgment giving reasons for orders made following an earlier enquiry in the same proceedings. The earlier judgment assessed damages for trade mark infringement and passing off and the debt due on the counterclaim; its citation is not stated in this judgment.