In these proceedings, Mr Fearns was awarded just under £440,000 in damages for trademark infringement and passing off by Anglo-Dutch and the other Defendants. However, it was also held that Mr Fearns owed Anglo-Dutch a trade debt amounting to almost €600,000.

The parties agreed that these sums should be subject to equitable set-off and judgment should be given for a single net sum but could not agree on how to convert the relevant amounts into a common currency. This was significant because the euro/sterling exchange rate had moved considerably over the relevant period of almost five years.

Decision

As there was little authority on this issue, the High Court took the opportunity to review the core principles of set-off in English law.

It concluded that, where a party has a claim against another, who in turn has a cross-claim, the two claims cannot be set off to extinguish the parties’ respective liabilities unless the parties agree to this or where there is a court judgment to this effect. As a matter of procedure, the parties could raise legal set-off as a defence in legal proceedings where both of the claims were for a due and ascertained amount. Additionally, equitable set-off could be relied on where two claims were made reasonably and in good faith and were “so closely connected that it would be manifestly unjust to allow one party to enforce payment without taking into account the cross-claim”. This could be outside of legal proceedings, as an immediate response to a liability to pay money due to another party or to the exercise of rights contingent on non-payment.

In this instance, where different currencies were involved, the court held that the smaller amount should be converted into the currency of the larger, at the rate applicable on the date of judgment. Furthermore, it was within the court’s discretion under its inherent jurisdiction to order the netting off of any sums, including costs. In this case, Anglo-Dutch was left owing a net sum of £37,000 to Mr Fearns. However, because he was insolvent, Anglo-Dutch would have been unable to recover their costs, despite the court considering them to be the substantive winners of the litigation. Accordingly, the court ordered a second round of set-off and no money changed hands.

Comment

This case illustrates that equitable set-off is not restricted to competing claims and counterclaims for damages in proceedings and may be of a wider application to situations involving insureds, brokers and third parties.

For non-UK business, insurers should note the mechanism by which sums in different currencies were netted off, although the Judge’s decision on this specific point is likely to be reviewed by the courts in the future.

Finally, insurers running subrogated claims should beware of whom they pursue, given the risk of unforeseen cross-claims arising which could leave them with a recovery much lower than expected, as a result of damages and costs being set off against each other.