| Date | 27 March 2002 |
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| Judgment | Bim Kemi -v- Blackburn Chemicals, CA 3 April 2001 |
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| The Issue | Whether a set-off can be raised as a defence to a claim which arises under a separate contract. |
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| Implication |
An equitable set-off in respect of a cross-claim for damages can be relied upon in defence to a claim for damages if it bears a close and inseparable connection to the claim. |
printA set-off is a counter-claim that operates as a defence to a claim. Thus, for example, where a sub-contractor makes a claim for payment for works carried out, the main contractor may seek to set-off against that claim, monies which the main contractor alleges it has incurred as a consequence of some breach of contract by the sub-contractor. The set-off, if valid, acts to reduce or to extinguish the claim for payment made by the sub-contractor. It is no surprise therefore that the construction industry has paid considerable attention to the question of set-off. It is clearly preferable for a defendant to treat a claim as having been discharged (in part or in full) by reason of the set-off, than to be obliged to meet the claim and separately seek to recover monies on a counter-claim. Prior to the Housing Grants, Construction & Regeneration Act, this point was of paramount importance to contactors. Providing the main contractor could satisfy a court on summary proceedings that it was entitled to apply a set-off against a sub-contractor's claim for payment, the sub-contractor would be refused judgment on its claim, even though that claim was for a certified or agreed amount. Thus a sub-contractor would be stood out of its money for a period of 18 months or more whilst the matter proceeded to arbitration or litigation, giving a substantial cash-flow advantage to the main contractor. The main contractor would often use that advantage to negotiate a settlement for an amount less than the sum properly due. This advantage is of less significance now that adjudication can result in a binding decision on the claim and counterclaim in four weeks. The 1958 Court of Appeal decision in the case of Hanak -v- Green is regarded as one of the key decisions defining the modern law of set-off. It may now be said there are four forms in which a set-off can arise: 1) Mutual liquidated debts (sometimes called legal set-off). A cross claim can be set-off as a defence if the amount of the debt is known or can be readily and without difficulty ascertained. 2) Equitable set-off (sometimes called transaction set-off). The test as to whether a cross claim can be relied upon as an equitable set-off is whether it is so closely connected with the claim that it would be manifestly unjust to allow the claim without taking into account the cross claim. 3) Contractual set-off. The contract may dictate certain procedures that must be observed to preserve the right to apply a set-off and, of course these days, such provisions are a necessary requirement in compliance with the Construction Act. 4) Statutory set-off. For example, under rule 4.90 of the Insolvency Rules 1986 an employer can set-off any claims it can prove against monies owing to an insolvent contractor. Equitable set-off was closely examined recently by the Court of Appeal in the case of Bim Kemi -v- Blackburn Chemicals Limited. Blackburn is an English company which makes and supplies chemicals, including anti-foaming agents, to paper manufacturers. Bim Kemi is a Swedish corporation which also makes and supplies chemicals principally to the paper industry in Sweden. In 1984, Blackburn granted a licence to Bim Kemi to use its know-how to process and sell anti-foaming agents produced under Blackburn's trademark. In 1994 a second contract was made between the parties giving Bim Kemi exclusive sales rights in Sweden for Blackburn's products. Some years later the parties fell out. In December 1998 Blackburn appointed new distributors in Sweden and refused to supply Bim Kemi. Bim Kemi treated that conduct as a repudiation of the second agreement, claiming damages for loss of profit of the order of 40 million Swedish Kroner. Blackburn countered that Bim Kemi was in breach of the first agreement by failing to inform Blackburn of its sales and by marketing its own alternative product. Blackburn argued that it was entitled to set-off its unliquidated claims arising from Bim Kemi's breach. The issue before the Court of Appeal was the degree of connection which must be shown between a claim for damages for breach of a contract, and a cross claim for damages for a breach of a different contract between the same parties, in order to permit the latter claim to be the subject of a set-off. Lord Justice Potter reviewed the guidance given in Hanak -v- Green. He noted that that case recognised a general right to equitable set-off for cases where a "close relationship existed between the dealings and transactions which gave rise to the respective claims". Lord Justice Potter also considered that the line of authorities from the courts demonstrated that it was not necessary that the cross-claim should arise out of the same contract. All that was required was that it should fall from the dealings and transactions which gave rise to the subject of the claim. He concluded that there was a single trading relationship between the parties instigated by the 1984 agreement and supplemented by the arrangements for the supply of new products under the 1994 agreement. In those circumstances it would be manifestly unjust to consider giving relief in respect of the claim without investigating and taking into account Blackburn's counter-claim that Bim Kemi was in breach of the 1984 agreement.
CJ-0212
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