Mr Justice Morison :
- There are various applications before me, which I will turn to in a moment. The background to them is as follows. The parties entered into a distributorship agreement under which the Spanish defendant company was appointed as sole distributor with respect to a number of different regions within Spain of the claimants' products sold to Spain. There is a dispute between the parties as to the extent of the territory. The Spanish company say that their territory was extended as the result of an oral agreement; the agreement is denied, and the claimants say that the documents which support it are not genuine; and they also say that the person from their group who was alleged to have made the agreement was not authorised or held out as having authority to do so. There is a further dispute about territory, namely whether the claimants were entitled to deprive the Spanish company of one of the regions, namely Cordoba.
- The distribution agreement has been terminated in circumstances which have given rise to a great deal of unpleasantness. In Spain there has been a complaint by the defendant against the claimants alleging criminal conduct, although fraud is not pleaded in the action brought within this country.
- The action within this jurisdiction is brought by the claimants, who say that they sold and delivered to the defendants a number of trucks which were ordered by them in their capacity as distributor under the umbrella of the distribution agreement. The claimants say that the terms and conditions which specifically cover this transaction are contained on the reverse side of an invoice. The defendants deny that these terms apply. They say the terms which do apply are those attached to and annexed to the distribution agreement and not on the back of the invoices. They also refer to the evidence and say that the invoices were created after the order had been placed and accepted, and do not evidence the terms of the contract itself.
- On the invoice terms there is a retention of title clause and a no set-off clause:
"5.5 The Buyer shall not be entitled to exercise any set-off lien or any other similar right or claim."
- There is also a clause which deals with disputes, clause 19.2, which reads as follows:
"For the benefit of Fermec, and subject as hereinafter appears, the parties submit to the exclusive jurisdiction of the courts of England and Wales in respect of all matters arising out of or in connection with:
(a) The Contract;
(b) any contract between Fermec and the Buyer for the sale of goods; and
(c) any goods sold or supplied by Fermec to the Buyer, and the Buyer hereby expressly and irrevocably waives its right to rely upon the jurisdiction of any other court which might otherwise be competent to determine the issues between the parties or to argue that the courts of England and Wales are not the appropriate or convenient courts to determine the issues or to rely upon any provision of the laws or procedural rules of any country which would or might if applied have the effect of denying jurisdiction to the courts of England and Wales or of denying recognition or enforcement of any judgment of the courts of England and Wales."
- In the terms annexed to the distribution agreement there is no anti set-off clause but there is a retention of title clause, and there is also in the distribution agreement itself an arbitration clause, at para.18, which reads:
"18.1 This Agreement shall be governed by and interpreted in accordance with the laws of England.
"18.2 Any and every dispute or difference between the parties concerning the validity, meaning or effect of this Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by a single arbitrator appointed in accordance with such Rules, the place of arbitration shall be in London, England and the language in which the arbitration proceedings shall be conducted shall be English.
"18.3 Notwithstanding the provisions of sub-clause 18.2 above, in the event that an action arises out of or in connection with an order from the Distributor and accepted by an MF Supplying Company such action shall be submitted to the jurisdiction of the Courts of the country of domicile of such MF Supplying Company or as otherwise provided in the standard Terms and Conditions of Sale of that MF Supplying Company current at the time of acceptance of such order.
"18.4 Nothing contained in this Clause 18 shall prevent MF from applying to an appropriate court in any part of the Territory or elsewhere for any injunction or other like remedy to restrain the Distributor from committing any breach or any anticipated breach of this Agreement and for consequential relief."
- There are essentially four applications with which this court is concerned, and two of them are closely related. The questions before me, as helpfully put by counsel for the claimants, (and I would like to pay tribute to both counsel for the way they have dealt with this case), are:
(1) is there any real possibility that the defendants have a defence to the claim by the claimants for delivery up of the goods the subject-matter of the action?.
(2) "do the defendants have any real prospect of defending the monetary claim, that is for the price of the goods?
(3) should the counterclaim by the defendants for unliquidated damages be stayed pending arbitration?.
(4) should there be a stay of execution of any judgment on the claim pending determination of the counterclaim?
- The essence of the defence and counterclaim is to be found in paras.9 and 25 of the defence:
"9. In breach of the agreements contended for in paragraphs 3-7 hereof, Fermec (acting through Atkinson):
"9.1 at a time unknown to Lopecan appointed a company known as Talleres Enpeca SL as distributor for the province of Cordoba and notified this to Lopecan by a letter (mis-dated 9 July 2002 but) received by Lopecan on or about 4 November 2002;
"9.2 sold or agreed to sell products encompassed by the distribution agreements set out in paragraphs 3-7 hereof in respect of the province of Cordoba otherwise than to Lopecan. Lopecan does not know the details of this breach of contract, and Lopecan seeks an inquiry into this matter;
"9.3 at a time unknown to Lopecan appointed a company known as Auto Reparaciones Guadalhorse SL as distributor for the provinces of Granada, Malaga and Jaen and notified this to Lopecan by a letter dated 14 March 2003;
"9.4 sold or agreed to sell products encompassed by the distribution agreements set out in paragraphs 3-7 hereof in respect of the provinces of Granada, Malaga and Jaen otherwise than to Lopecan. Lopecan does not know the details of this breach of contract, and Lopecan seeks an inquiry into this matter.
..........
"25. Further, by reason of the breaches of contract set out in paragraph 9 hereof, Lopecan has suffered loss and damage as follows:
"25.1 Lopecan has lost profits on all the sales which it would have made in the provinces of Cordoba, Granada, Malaga, Jaen. Since Lopecan had already established itself in those provinces, it will say that it would have sold more goods than Fermec's new appointed distributors have been able to sell (details will be supplied after disclosure is given of the sales activity which has been taking place in the provinces of Cordoba, Granada, Malaga, Jaen). Lopecan's gross margin for machinery is 31% and for spare parts is 45%. Lopecan's sales plan was for 33 units in 2003, 47 units in 2004 and 70 units in 2005. Lopecan will say that its margin was worth in excess of Euros 550,000 per annum;
"25.2 Lopecan has been unable to sell goods the subject matter of the claim and has lost the revenues on those goods - the purchase of the goods are wasted expenses and the spare parts and stocks which Lopecan has invested in and bought from Fermec represent a wasted expense occasioned by Lopecan (amount of claim to be detailed, but approximately Euros 600,000);
"25.3 Lopecan has incurred the wasted expense of hiring, training, maintaining, paying and then disposing of its workforce and of their travelling; in particular in relation to in the provinces of Granada, Malaga, Jean; and employment costs of employees in relation to Cordoba (amount of claim to be detailed, but approximately Euros 215,000);
"25.4 Lopecan has incurred expenses in relation to premises and overheads in relation to the provinces of Cordoba, Granada, Malaga and Jaen, which are wasted expenses;
"25.5 Lopecan has incurred costs in providing after sales service and sorting out customer problems in Cordoba, Granada, Malaga, Jaen which are wasted expenses;
"25.6 Lopecan has forgone the profit it would have earned on its business with Takbuchi Corp which it was not able to pursue because of its agreement not to deal in goods competing with those of Terex."
- These applications are brought at an interlocutory stage, and it follows therefore that I must be careful that I say nothing which will affect the case, if it is to continue, because there may well be issues of fact, and certainly on law, which will arise for consideration; but I am bound to deal with the arguments that have been presented to me. To some extent I think Mr. Dye, for the Spanish company, is correct when he submits that there is inconsistency in the claimants' claims for delivery up on the one hand or for the price of goods sold and delivered on the other. I think he is right that the action for the price of goods sold and delivered implies that property has passed, whereas the application for delivery up is based on a retention of title clause which, as I have indicated, appears in both the terms attached to the distribution agreement and on the back of the invoice. There is no indication and no argument to the effect that by claiming both there has been some kind of waiver of the retention of title clause; quite rightly in my view, because it is obvious that the claims are alternative and are put to the court on that basis.
- The real argument between the parties hinges on the question whether the counterclaims which are being brought in this case and the defences which are being advanced constitute what the courts now call a transaction set-off, on the one hand, or an independent set-off, on the other. The two have quite different effects. A transaction set-off operates as a defence (see the case of Glencore Grain v. Agros Trading) whereas an independent set-off involves, so to speak, striking a balance of account, where the two claims are looked at independently. The transaction set-off, as I say, operates as a defence as such and extinguishes the claim.
- What is the nature of the set-off alleged in this case? It can be seen from the pleadings that part of the set-off is intimately connected with the claim. The purpose of the distribution agreement was to enable the defendants to sell the goods which they were procuring, ordering and buying from the claimants. They were to have exclusive access to a market for the Claimants' goods. The distribution agreement, as was correctly submitted by counsel for the claimants, did not constitute a contract of sale in itself, it transferred rights to the parties, including, in particular, the right of the defendants to sell the goods which he had bought from the claimants in the designated agreed territories.
- What the defendant says is that, as a result of the claimants wrongly, as they allege, interfering with the territorial rights granted by the distribution agreement, the cost, that is the purchase price of the goods which is the subject-matter of these proceedings, has been wasted. It is, to quote the words of the pleading, "wasted expenses", and the spare parts and stocks which the defendant has invested in and bought from the claimants represent a wasted expense occasioned by the claimants. So the defendants are saying that they should not be obliged to pay for the goods because they have a defence to the claim for the price of the goods on the basis that they have a set-off due to the infringement of their rights under the territorial agreement contained in the distributorship agreement.
- Is that a transaction set-off? It seems to me that it is, or, to put it more neutrally, it is strongly arguable that it is. I start with the text book which has helpfully been provided to me, called "The Law of Set Off" by Rory Derham, the third edition. At p.83 of the book it is made plain by the learned author that, so far as the courts are concerned, the approach in a set-off situation is not to ask the question, "Would it be just or fair to deprive the defendant of a potential set-off?" These are not questions which determine whether there is a transaction set-off situation or not. It was put much more elegantly by the late Mr. Justice Hobhouse, where he said, in the case of Leon Corporation v Atlantic Lines & Navigation Co Inc ("The Leon") (1985) 2 Lloyd's Rep 470 at p.474) :
"Equitable principles derive from a sense of what justice and fairness demand. This does not mean that equitable set-off has been reduced to an exercise of discretion. Since the merging of equity and law equitable set-off gives rise to a legal defence. This defence does not vary according to the length of the Lord Chancellor's or arbitrator's foot. The defence has to be granted or refused by an application of legal principle."
- The legal principle involved is set out clearly, in my judgment, in the case of Glencore Grain v. Agros Trading, a decision of the Court of Appeal, reported at [1999] 2 All E.R.288, where the court analyses and helpfully summarises the effect of the seminal decision given by Lord Justice Hoffmann, who I think was responsible for coining the phrase "transaction set-off and independent set-off" in the case of Aectra Refining and Marketing Inc. v. Exmar N.V. [1995] 1 All E.R.641. As always, in these cases it is not so much the definition of the principle which is difficult, it is the application of the principle to the facts in question. There must be, as it seems to me, a close commercial relationship between the claim on the one hand and the defence and counterclaim on the other.
- In Dole Dried Fruit and Nut Co. v. Trustin Kerwood Ltd. [1990] 2 Ll.Rep.309, the Court examined a case which was not that dissimilar to the present one. It was a distributorship agreement. The defendants' case was that they were appointed by the plaintiffs as sole and exclusive agents for the importation and distribution in England of the plaintiff's prunes and raisins. They acquired those products, and the defendants claimed damages for repudiation of the distribution agreement. Three weeks later the plaintiffs commenced separate proceedings in which they claimed $735,000 as the price of goods sold and delivered under a series of sale contracts. The defendants did not dispute the plaintiff's claim but they said that they were entitled to set-off their counterclaim for unliquidated damages. In the Court of Appeal Lord Justice Lloyd said this:
"The whole purpose and intent of the agency agreement was that the parties should enter into contracts for the purchase and sale of the plaintiffs' goods."
I interpose, so here.
"The sale contracts were thus concluded in fulfilment of the agency agreement."
So here.
"In those circumstances the claim and the counterclaim are sufficiently closely connected to make it unjust to allow the plaintiffs to claim the price of goods sold and delivered without taking account of the defendants' counterclaim for damages for breach of the agency agreement. If that is right, then the defendants are entitled to rely on their counterclaim as a set-off. It follows that they have an arguable defence for the purposes of [Order 14]. Accordingly I would dismiss the plaintiffs' appeal."
- It has been submitted to me that that case was exceptional in the sense that it is an example, possibly the only example, where a claim for a liquidated sum has been met with a defence based on a counterclaim for unliquidated damages. But the Court of Appeal reconsidered the matter in Bim Kemi v. Blackburn [2001] 2 Ll.Rep.93, where the court held, firstly, that the degree of closeness required for an equitable or transaction set-off was that of an "inseparable connection", but it was not necessary that the cross-claim should arise out of the same contract. All that was required was that it should flow from the dealings and transactions which gave rise to the subject of the claim; secondly, and I take this from the headnote:
"the principle that the cross-claim should be one flowing out of and inseparably connected with the dealings and transactions which also gave rise to the claim was apt to cover a situation where there were claims and cross-claims for damages in respect of different but closely connected contracts arising out of a long-standing trading relationship which was terminated; that fact would not per se so establish the requisite 'inseparable connection' but in an appropriate case it might well be manifestly unjust to allow one claim to be enforced without taking account of the other ..."
In his judgment, Lord Justice Potter, at para.36, said:
"Like the Judge, I consider that Mr. Turner's submissions for Blackburn are correct. In so holding, again like the Judge, I regard it as appropriate to apply the test propounded by Lord Brandon in the Bank of Boston case unconstrained by the former concept, difficult to define and apply, of 'impeachment of title', which has since been replaced, or at least redefined, in terms of a cross-claim which 'flows out of and is inseparably connected with the dealings and transactions giving rise to the subject in the claim'. While the circumstances of every case call for individual consideration, it seems to be that the Dole Fruit case provides a useful parallel with the situation in this case. There, the Court was satisfied there was a sufficiently close connection in the case of a claim for the price of goods sold and delivered pursuant to a contract made under the 'umbrella' of a distributorship agreement which had been repudiated."
And he then went on to say that, in the present case, the connection was less close, but nonetheless the test of a close and inseparable connection was satisfied. That does, I think, infer that the case of Dole is not to be regarded as an oddity but, rather, has been given the stamp of approval by the court when considering the question of set-off.
- Therefore, applying the principles to the facts of this case, it seems to me to be very arguable that the defendants have a defence to the claim for the price of goods sold and delivered because the sale contract was under the umbrella of the distribution agreement and the claims and cross claims are closely connected in a commercial sense. It is true that the evidence as to the amount of damages which are to be claimed in the counterclaim have not yet been fully quantified or properly formulated, and it is fair to point out that the evidence in relation to the damages claim is thin, but this is the Commercial Court and it, the court, is familiar with the damage which may be caused to a distributor by the wrongful repudiation of his distributorship agreement as is alleged, whether in removing Cordoba or the way the Claimants are alleged to have repudiated the Distributorship Agreement. It is not speculative to suggest that the amount of the cross-claim could be substantial, and could well exceed the amount of the claim.
- What does this say, if anything, about the alternative claim for delivery up of the goods? Does the retention of title clause enable the claimants to say that they are entitled to have their goods back even if there is a potentially substantial counterclaim against them which would have been a defence to the price of the goods. This is a more difficult question, as it seems to me, and I will simply say for present purposes that I think it is arguable that the retention of title clause in a case such as this, where there is a defence to the claim for the price of the goods, may not work. It is arguable, and it is sufficiently arguable, to warrant the court not granting relief summarily, as is sought at this time. The answer to questions 1 and 2 are, therefore, 'yes'.
- I turn therefore to the next question, which is whether the cross-claim in this case should be stayed pending arbitration. The answer, in my judgment, to that question is it may depend on whether the invoice terms are the applicable terms or not. That question is not in the slightest easy to decide. The terms of the distributorship agreement provide, in clause 9.1, the terms of the sale contracts as at the commencement date of the agreement, and the terms and conditions of sale are as set out in schedule A; but the Agreement also provides that those terms may be effectively varied. The trading terms are those current at the time of acceptance of any order as the same are, from time to time, notified to the distributor.
- The distributorship agreement in clause 20 provides for formal notification or notice to be given in writing, and it provides that:
"Notice may be given by any means reasonably calculated to reach the other party, including without limiting the generality of the foregoing, telex, facsimile transmission or prepaid mail addressed to such party at its address as hereinbefore contained."
- The argument for the defendant is that the notification provisions are not satisfied by the statements on the back of invoices which are produced after the order has been placed with the claimant company; in other words, a post contractual invoice. On the other hand, the claimants say that argument might be a valid one in relation to the first order which was placed in relation to which there was such an invoice, but it cannot operate in relation to subsequent invoices. The claimants say that the invoices contain an appropriate notice of the trading terms and conditions of the claimant company. On the other hand, the defendants say that the terms were in English on the back of the invoices, in exceptionally small and difficult to read print, and that would not be sufficient notice of a significant change in the terms and conditions. It is also arguable that the terms on the back of the invoice were not terms which governed the sale of the goods because they included, for example, an applicable law and jurisdiction clause which appeared to alter the terms of the Distribution Agreement.
- What should I do in the light of this unresolved dispute as to whether the distribution agreement terms apply, in which case there is an arbitration clause, or the invoice terms which may cast some doubt on that? In addition to the question as to which terms prevail, as to which I think there is a very triable issue, which will have to be determined at trial, there is also a question as to whether the arbitration clause in the distributorship agreement has the effect contended for by the claimants. The claimants effectively say that clause 18.3 permits them to sue in these courts for the price or for the return of the goods, as the case might be, and that any cross-claim will have to be dealt with under an ICC arbitration in accordance with clause 18.2. The parties could have arrived at such a result, but what Mr. Dye says, on behalf of the Spanish company, is that, when one looks at the wording of clause 18.3:
"Notwithstanding the provisions of sub-clause 18.2 above, in the event that an action arises out of or in connection with an order from the Distributor and accepted by a [claimant] Supplying Company ..."
such action shall be submitted to the jurisdiction of the courts of the country of domicile of the claimants; whereas claims under the distributorship agreement were to be dealt with differently.
- I gave my judgment orally immediately following the argument on a Friday. Before the Order was drawn up, the Claimants, through leading counsel, Mr Eder QC, invited the court to receive further argument on the arbitration point, which he said was the only point on which the claimants were minded to seek to appeal. In the absence of objection from Mr Dye, I permitted the claimants and defendants to re-argue that point. I had also been provided with a copy of the transcript of my ex tempore judgment for correction. At the end of the further argument, I indicated that I would hand down a judgment which would reflect the corrections I wanted to make to the draft and would reflect the fuller arguments presented on the arbitration question.
- Mr Eder QC submitted that it was clear from the way the arbitration agreement was structured that there was a 'bifurcation' between claims for the price, on the one hand, and cross claims under the distributorship agreement on the other. It was contemplated that as suppliers, the claimants would have a speedy remedy for summary judgment before the court and that any claims under the workings of the distributorship agreement, which were likely to be more complex and lengthy would be referred to arbitration. He accepted that within the "action" there would be room for defences relating to the quality of the goods and what might be called transactional defences, assuming the no set-off provision did not apply. But what was not included within the concept of the action was a counterclaim which was either non-transactional or, to the extent that it exceeded the amount of the claim, a transactional counterclaim. He submitted that clause 19 of the invoice terms also reflected the intention to bifurcate the claims and cross claims.
- Mr Dye, on the other hand, submitted that clause 18.3 of the Distribution Agreement was apt to cover a case where the transaction set-off, based on a counterclaim, exceeded the value of the claim. Clause 18.3 referred to the action, not a claim by the supplier but an action arising from the sale of the products. This was such a case; both the claim and cross claim arise out of the supply of goods, and on a sensible reading of the clause the "action" was apt to include defences and counterclaims. If the claimants relied on the invoice terms, and if they were applicable, the proper construction of clause 19.2 ("any contract between Fermec and the Buyer for the sale of goods") was apt to include the distributorship agreement itself since by clause 9.1 of the Distributorship Agreement, each order placed by the distributor
"will … be deemed to have been so accepted upon and subject to the terms and conditions of this Agreement as well as the standard Terms and Conditions of Sale …".
- Having had the benefit of further argument on this question, my view remains the same. It seems to me unlikely that the parties intended clause 18.3 to have the effect contended for by Mr Eder QC. Take this case as an example. Here, the counterclaim operates as a defence by way of set off. In order to establish that defence the defendant will have to prove the losses pleaded at paragraph 25 of his counterclaim [see paragraph 8 above]. Until the end of the trial it may not be known whether in total those cross claims, if made out, will exceed in value the amount of the claim. If they did, then the court would find the amount proved under the various heads and then, if Mr Eder were right, refer the question of excess to an arbitration. At the arbitration, there would be an issue estoppel and the arbitrators would simply be asked to endorse the Court's decision as to the excess. That cannot make commercial sense. If the cross claim did not amount to a transactional set-off, then I can quite understand that the Court would be obliged to refer such a claim to arbitration under section 9 of the Act. But the question is how clause 18.3 should be construed and I consider that Mr Dye's emphasis on the word "action" as apposite to cover both claim and cross claim, which is a partial set-off, makes commercial sense. The courts will, when construing an arbitration agreement seek to give it business sense against the likely background that parties will incline to what might be called a one-stop litigation process. I therefore do not need to express a view about clause 19.2 of the invoice terms. Mr Eder QC submitted that Mr Dye could not rely on the very terms he said were not applicable; Mr Dye said that Mr Eder was seeking to invoke an arbitration clause in one contract whilst asserting that other terms applied to a supply contract which incorporated the Distribution Agreement. If I had to express a view about it, I am inclined to think that Mr Dye is right on this point as well. It follows, therefore, that I shall not order a stay of any part of the counterclaim. There is nothing to stay unless and until the counterclaim is proved to exceed the amount of the claim and at that point no stay is appropriate because the excess is proved in the "action" which covers both defence and counterclaim on the facts of this case.
- So, therefore, I turn to the last question: should there be a stay of execution? That does not, as it happens, arise, but I wish to make it plain that I would have granted a stay if I had either ordered delivery up or ordered the price of goods sold and delivered, because it does seem to me that the defence and counterclaim are so inextricably entwined with the claim as to make it unjust for the claimants to be able to take a bite at the case in their favour, leaving the defendants to pursue their remedies separately.
