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Set-off between amounts payable in different currencies

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Amy Edwards

Senior PSL - Litigation


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02 November 2010

Gary Fearns v Anglo-Dutch Paint & ors [2010] EWHC 2366 (Ch), 23 September 2010

In Gary Fearns v Anglo-Dutch Paint & ors [2010], Mr G Leggatt QC (sitting as Deputy Judge of the Chancery Division) considers important questions concerning the set-off of competing claims in different currencies, and the effect of exchange rate fluctuation between the time a claim arises and the date of a final judgment.

The analysis of the effect of equitable set-off is contrary to some leading commentators on the law in this area. The judgment also considers the test for setting off a damages award against a costs award in litigation.

The case concerned the date at which the damages payable (in sterling) to the claimant, and the debt payable (in euros) by the claimant to the first defendant (the defendant) should be converted into a common currency and set off against each other to derive a net liability. The judge “found that question difficult as well as being one on which, perhaps surprisingly, there appears to be little direct authority”.

By a judgment dated 28 July 2010, damages of GBP438,569 were payable to the claimant as compensation for the defendant’s infringement of his Autopaint trade mark and passing off. This sum comprised GBP162,679, in respect of profits lost in the period up to the end of June 2005 as a result of unlicensed sales made by the second defendant (Anglo Dutch) to franchisees, and GBP275,890 in respect of profits lost in the period from the end of June to the end of December 2005 as a result of the loss of the Autopaint franchisee network.

The court had assessed a debt owed by the claimant to the defendant in the principal sum of EUR594,696, in respect of related goods sold to the claimant by the defendant.

The date of set-off

It was common ground between the parties that the damages awarded to the claimant and his debt to the defendant should be set off against each other and judgment given for a single net sum. The issue in dispute was the date at which the amounts of the claim and counterclaim should be converted into a common currency. The claimant contended that his claim should be converted at the rate applicable in 2005, when his claim arose. The defendant contended that the relevant date was the date of judgment, ie 28 July 2010.

The date mattered because the rate of exchange between sterling and the euro had altered significantly over the relevant period. In 2005, the rate of exchange was around GBP1: EUR1.45. Converted at that rate, the damages of GBP438,569 payable to the claimant would be equivalent to EUR635,925 (EUR41,229 more than the debt which he owed the defendant). However, at the time of the judgment the rate of exchange was around GBP1: EUR1.20. Converted at this rate, the damages would be equivalent to EUR526,283 (EUR68,413 less than the debt owed to the defendant).

At the heart of the timing issue was a dispute as to how the doctrine of equitable set-off operated. The claimant asserted that the two claims were subject to an equitable set-off, the effect of which was to reduce the amount owing to the other party. This effect, said the claimant, was automatic, so that as and when the claimant’s right to damages arose (ie 2005), his liability to the defendant was reduced by the amount of the damages. Alternatively, the claimant pleaded that the set-off took effect when it was pleaded as a defence to the defendants’ counterclaim at the end of October 2005. In practical terms it would make no difference which of these dates was chosen as the exchange rate was around GBP1: EUR1.45 throughout 2005.

The defendant denied that either the existence or the exercise of the equitable set-off had the effect of extinguishing or reducing either party’s liability to the other. The correct approach was to calculate the total amount of each liability, including interest at a rate appropriate to the currency of the liability, at the date on which the court gives judgment; and then to convert the lesser sum into the currency of the greater at the exchange rate prevailing on that date and deduct it from the greater sum, giving judgment for the balance.

After a detailed and careful analysis of the different types of set-off recognised under English law, acknowledging that it is a “ready source of confusion”, the judge concluded that:

  • where one party has a claim against another party who has a cross-claim, the two claims cannot be netted off so as to extinguish or reduce each liability to the extent of the other, except by agreement or a judgment of the court (this is contrary to some leading commentators – see “Comment” below);
  • where the two claims are for sums of money which are due and certain in amount, each party may raise a defence to the extent of its own claim in proceedings brought by the other (legal set-off);
  • where the two claims are (i) made reasonably and in good faith and (ii) so closely connected that it would be manifestly unjust to allow one party to enforce payment without taking into account the cross-claim, neither party may exercise any rights contingent on the validity of its claim except insofar as it exceeds the other party’s claim (equitable set-off). The court rejected the claimant’s argument that the effect of equitable set-off was automatically to reduce or extinguish one claim as against another. The effect of such a set-off instead is provisional, until such time as the liability is finally determined either by agreement or by court judgment;
  • under CPR r40.13 and the court’s inherent jurisdiction, the court has a discretion to order any judgment sum to be set off (in the sense of netted off) against any other such sum (judgment set-off). 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 or was established (ie in this case, the judgment date);
    the approach which the court should adopt when ordering such a set-off between amounts payable in different currencies is: (i) to assess and add to each principal amount any interest accruing up to the date of the set-off; (ii) to convert the smaller amount into the currency of the larger amount at the exchange rate prevailing at that date; and (iii) to order payment of the balance.

Applying these principles to the present case meant that the date at which the damages payable to the claimant, and the sum which he owed to the defendant, fell to be converted into a common currency and netted off against each other was the date on which the amounts of those liabilities were finally determined, ie the date of the judgment, in accordance with CPR r40.13 (judgment set-off).

Damages for currency loss

This finding raises the possibility of a claimant not being able to quantify its loss until judgment. For example, suppose that A exercises a right to set off (either by way of legal or equitable set-off) a claim for damages against a debt owed to B and that the two liabilities are in different currencies. At the time when A asserts its claims, the exchange rate is such that B’s liability, correctly calculated, exceeds the amount of A’s debt. However, the claim is disputed, and by the time its amount has been determined by the court, the exchange rate has fluctuated so that, when converted into the same currency, A’s claim is now worth significantly less than the amount of the debt. The judge recognised that it may be said that it is unfair if the conversion is made at the exchange rate current at the date of judgment so that A has to bear a liability which has only arisen because of the time taken to resolve the dispute. These facts were, in essence, the facts of the present case.

However, the judge did not think that the law was defective in this regard, because the loss resulting from the movement in the exchange rate could form part of A’s claim. Just as a party may in principle recover damages for a currency exchange loss caused by late payment of a debt, so too may such a loss form part of the damage caused by the other party’s tort or breach of contract.

The basic object of an award of damages in contract or tort is of course to put the injured party in the same financial position as he would have been in if the breach of contract or tortious act had not occurred. Thus, if A would, but for the existence of the claim on which he relied by way of set-off, have paid the debt, he can in principle (subject to considerations of remoteness etc) add the loss flowing from the movement in the exchange rate to the amount of his claim. If, on the other hand, he would not have paid the debt anyway, for example, because he disputed the debt on other, invalid grounds and relied on set-off only as an alternative basis for non-payment, then there was no injustice in A bearing the loss resulting from the fall in the value of the currency of his claim.

Accordingly, in the present case the fact that the date of currency conversion was the date of the court’s order did not mean that the claimant must necessarily bear the loss caused by the fall of sterling against the euro since 2005. If, on the facts, it is found that the claimant would have used the profits of which he was deprived by the defendants’ wrongful acts of trade mark infringement and passing off to pay off part of his debt to the defendant, he could in principle have claimed the additional loss which he has suffered because sterling had depreciated before the damages were paid as a further head of damages.

It was clear on the evidence, however, that the claimant would not have applied such profits to reduce his debt to the defendant. Under the arrangements which the parties had made, the only source of funds from which his debt was being reduced was the sales which the defendant/Anglo Dutch were authorised to make to the franchisees. If the claimant had made more sales himself, he may well have used the profits to buy more products from the defendant; but there was no prospect of his using the money to pay his outstanding debt.

On the facts of this case, therefore, the claimant could not, and did not, claim that the loss which he suffered because of the fall in the value of sterling against the euro between the time when his claim arose and the date of judgment was caused by any wrongdoing of the defendants. In these circumstances it was not a loss for which the defendants could be held responsible.

The order 

The court directed that a balance should be calculated as at 28 July 2010 (date of judgment) at the exchange rate of GBP1: EUR1.20 current at that date between the principal amounts referred to in the judgment after adding interest on each amount up to the date of the order. Interest was awarded on the claim at a rate of 5% above the Bank of England’s base rate and on the counterclaim at 1½% above the European Central Bank’s rate. The unusually high premium above the base rate awarded on the damages payable to the claimant was based on evidence adduced of the high cost of borrowing for a person in his “parlous” financial circumstances.

In the event, although the exchange rate was less favourable to the claimant when judgment was given than it had been in 2005, the interest accrued on the damages payable to him was substantially more than the interest on the euro debt which he owed to the defendant. There were two reasons for this: first, the fact that sterling interest rates during the intervening period were generally higher than the rates available for borrowing in euros; and second, the higher premium over the applicable base rate already mentioned.

When the claim and counterclaim were netted off, the result was a balance due to the claimant of GBP36,832.72.


Although there was a balance in favour of the claimant, the judge took the view that the defendants were in substance the successful party when the case was looked at as a whole. He thus ordered the claimant to pay 70% of the defendants’ costs of the claim and enquiry, and made an order under CPR r44.3(8) for an amount of GBP300,000 to be paid by the claimant as an interim payment on account of the defendants’ costs.

Set-off of costs against damages

A further question arose as to whether the interim payment on account of costs should be set off against the defendants’ net liability in damages to the claimant, thereby extinguishing the latter’s liability and resulting in a sum of GBP 263,127.28 payable to the defendants. In ordinary circumstances whether such a set-off was ordered would be of little or no practical consequence. However, the claimant was insolvent. If no set-off were ordered, the defendants would have to pay out the sum of GBP 36,832.72 while at the same time recovering nothing in respect of the costs awarded to them.

The court held that the connection between the two sums was such that justice plainly required that they be set off. It would be manifestly unjust that the claimant should receive a share of the damages free of the liability to make a payment on account of the defendants’ costs which was part of the cost of obtaining the damages award.

Comment: This case is interesting in a number of respects.

First, the judge disagrees with leading commentators on whether the effect of equitable set-off is to extinguish or reduce a claim and cross-claim except insofar as one exceeds the other. This was the argument put forward by the claimant and it is supported by Wood on Setoff and Netting, Derivatives and Clearing Systems (2007) and Goode on Legal Problems of Credit and Security (4th Ed, 2008). This point is likely to be the subject of further judicial consideration.

Secondly, the case shows how competing claims in different currencies will be treated by the court. It is only when a court has issued a final judgment on the claims that the conversion will be performed, at the rate of exchange current at the date of judgment. At the outset of a claim therefore, a claimant will need to assess the exchange rate risk associated with a defendant’s cross-claim being in a different currency from the claimant’s claim. The claimant will need to consider whether part of its claim should include any loss resulting from a change in the exchange rate between the date of the claim arising and the date of judgment. In looking at this type of claim, a court will apply a but-for test, ie if a claimant would, but for the existence of the claim on which he relied by way of set-off, have paid the defendant, then the claimant can in principle add the loss flowing from the movement in the exchange rate to the amount of his claim. If on the other hand he would not have paid the debt anyway (perhaps for other reasons) then this but-for test will not be satisfied.

Finally, the judgment provides an excellent summary of the legal foundation and effect of different types of set-off.