In a case involving a claim for damages for trade mark infringement and passing off against a defendant to whom the claimant owed a debt, the High Court considered the meaning of “set-off” under English law, an area where there is little direct authority.
Fearns sold high quality paint for use on cars under the mark AUTOPAINT and the logo shown below. Both marks were registered in classes 2, 3 and 17.
Anglo-Dutch was the main supplier to Fearns and the UK distributor of the second defendant, a Dutch paint manufacturer named De Beer.
Fearns was regularly indebted to De Beer in amounts in excess of his permitted credit terms. As a means of reducing Fearns’s debt to De Beer, it was agreed that De Beer could sell paint direct to Fearns’s franchisees under the AUTOPAINT mark whenever Fearns was unable to supply the franchisees with a required product himself. Fearns’s business fell into severe financial difficulties and eventually collapsed.
Judgment May 2, 2007
Mr Leggatt QC, sitting as a Deputy Judge, held that although there had been an oral agreement between Fearns and De Beer which entitled De Beer to sell directly to Fearns’s distributors whenever Fearns was unable to supply a particular product, De Beer had gone further than what was permitted under the agreement by extending sales to the entire range of Fearns’s products. As such, Fearns’s action for trade mark infringement and passing off succeeded.
Damages enquiry July 9, 2010
In the subsequent damages enquiry, it was held that Fearns was entitled to damages of £438,569 and De Beer was entitled to the unpaid price of goods sold to Fearns totalling €594,696. It was common ground between the parties that the two sums should be set off against each other and judgment given for a single net sum, however it was disputed as to the date at which the claim and counterclaim should be converted into a common currency. This was of particular importance as the rate of exchange between sterling and the euro had fluctuated greatly during the relevant five-year period.
Judgment on Set-Off July 28, 2010
Although Mr Leggatt QC gave judgment on this issue on 28 July 2010, he did not hand down written reasons for his decision until 23 September 2010.
Mr Leggatt QC confirmed that the exercise of the equitable set-off did not have the effect of extinguishing or reducing each party’s liability to the other. In the absence of agreement between the parties, only a judgment of the court can discharge a party’s liability and only once both liabilities have been established.
The approach the court should adopt when ordering set-off between amounts payable in different currencies is: (i) calculate the total amount of each liability, including interest up to the date of the set-off; (ii) convert the lesser sum into the currency of the greater sum at the prevailing exchange rate and deduct it from the greater sum; and (iii) order payment of the balance.
Furthermore, under CPR 40.13 and the court’s inherent jurisdiction, the court has a discretion to order any sum to be netted off against any other judgment sum. The date at which such a set-off should be effected is the date on which the existence and amount of the two liabilities is established, which was held to be the date of judgment. Accordingly, the claim and counterclaim were netted off by applying the exchange rate current on July 28, 2010. Although the 2010 exchange rate was less favourable to Fearns than it had been in 2005, as the interest accruing on the damages was significantly higher than the interest accruing on the debt, the result was a balance due to Fearns of £36,833.
Set-Off of Costs against Damages
Although the calculation resulted in a net amount being due to Fearns, Mr Leggatt QC took the view that on the whole De Beer were the successful party. As such, Fearns was ordered to pay 70% of De Beer’s costs and to make an interim payment of £300,000 on account.
Ordinarily it would be of little consequence whether set-off of damages against costs was ordered. However, as Fearns was insolvent, any damages recovered would go mainly to Fearns’s creditors (other than De Beer), leaving De Beer to pay out almost £37,000 whilst recovering none of the costs awarded to them.
Mr Leggatt QC considered that it would be manifestly unjust if the creditors were to receive a share of the damages free of the liability to make a payment on account of De Beer’s costs. In the present case, it did not matter whether the Court applied the test for equitable set-off or if it acted using its inherent discretion, as the connection between the two sums was such that justice plainly required they be set off against each other.
For these reasons, the damages due to Fearns were set off against the interim payment due to De Beer on account of costs, resulting in a sum of £263,127 payable to De Beer.
This judgment contains a useful consideration of the case law relating to equitable and legal set-off, and confirms that the exercise of a right of set-off will not operate to extinguish each party’s liability to the other. In addition, the decision highlights the court’s inherent jurisdiction and power to allow a costs order to be set-off against an award of damages at its discretion.
Practitioners will welcome the clearly set out guidance in the judgment on the approach a court should adopt when ordering set-off between two liabilities, particularly when issues of currency loss and interest are involved.