[COURT OF APPEAL]

B.I.C.C. PLC. v. BURNDY CORPORATION AND ANOTHER

[1982 B. No. 16439]

Practice - Set off - Specific performance claim - Joint interest in patents - Forfeiture of interest on failure to pay half costs of maintaining patents - Costs not paid within contractual period - Plaintiffs claiming specific performance of contract assigning to them defendants' interests in patents - Whether moneys owing for goods sold to plaintiffs to be set off against costs of patents

Equity - Relief from forfeiture - Personal property - Commercial Contract concerning patent rights - Claim for specific performance of contract assigning to plaintiffs defendants' interests in patents - Whether jurisdiction to grant relief against forfeiture

The plaintiff company and the first defendant company had traded together for a number of years and they each held 50 per cent. of the second defendants' shares. They decided to dissolve the joint relationship and to do so entered into a number

of agreements, including an agreement (the "commercial agreement") for the sale of goods by the first defendants to the plaintiffs and an agreement (the "assignment") dealing with the distribution of the rights and responsibilities of each of the parties in relation to a number of patent and other rights (the "joint rights") previously acquired and held jointly by the two companies. By clause 10(ii) of the assignment, the plaintiffs were to be responsible for the processing and maintenance of the joint rights, while the first defendants were to reimburse, upon the plaintiffs' request, half of any expenses thus incurred. By clause 10(iii), if either party failed to fulfil their obligations under clause 10(ii), the party not in default was to be entitled to require the party in default to assign to them all their interests in the joint rights concerned.

The plaintiffs incurred expenses in relation to a number of the joint rights and duly invoiced the first defendants for half of that sum. When the first defendants failed to make reimbursement within the time limit, the plaintiffs claimed that under clause 10(iii) of the agreement they were entitled to an assignment of the first defendants' interest in those joint rights. They brought an action for the specific performance of the assignment agreement. By their defence, the first defendants sought to set off the far greater sums due to them from the plaintiffs under the commercial agreement and, alternatively, relief against forfeiture of their property. Falconer J. held that as the plaintiffs' claim was for specific performance of an agreement to execute an assignment, no defence of set off could lie. He also held that if clause 10(iii) was a forfeiture clause then he had no jurisdiction to grant relief against forfeiture, because clause 10(iii) was part of a commercial agreement entered into between parties bargaining at arm's length; and that even if he did have jurisdiction he would, in the exercise of his discretion, have refused the first defendants relief.

On appeal by the defendants: -

Held, allowing the appeal, (1) that under clause 10(ii) of the assignment agreement the plaintiffs could have recovered the sums due as moneys paid for the use of the first defendants and, if they had done so, the first defendants would have been entitled to set off the moneys due under the commercial agreement; that (Kerr L.J. dissenting), although the plaintiffs were seeking the equitable relief of specific performance and the defence was a legal set off, the first defendants were not debarred from seeking to set off a liquidated sum that the plaintiffs must be taken to know was due under the commercial agreement as a defence to the plaintiffs' claim for equitable relief for the contractual failure to pay the moneys due under the assignment agreement (post, pp. 248C-E, 249C-E, G, 260A).

Stooke v. Taylor (1880) 5 Q.B.D. 569, D.C. and Hanak v. Green [1958] 2 Q.B. 9, C.A. applied.

Dictum of Lord Denning M.R. in Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, 974, C.A. and British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137 considered.

(2) That, although relief from forfeiture was only available where a plaintiff was seeking the forfeiture of proprietary or possessory rights, the relief was not confined to proprietary or possessory rights in land or excluded because the rights arose under a commercial contract; that, therefore, the court had

jurisdiction to grant the first defendants relief from forfeiture of their rights in the patents arising under a commercial agreement; and that, in the exercise of its discretion, the court would grant relief by extending the time in which payment was to be made under the assignment agreement (post, pp. 252A-B, F-G, 253B-H).

Dicta of Romer L.J. in Stockloser v. Johnson [1954] 1 Q.B. 476, 502, C.A.; Pennycuick J. in Barton Thompson & Co. Ltd. v. Stapling Machines Co. [1966] Ch. 499, 509 and Edmund Davies L.J. in Starside Properties Ltd. v. Mustapha [1974] 1 W.L.R. 816, 822, C.A. applied.

Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 A.C. 694, H.L.(E.) and Sport Internationaal Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 W.L.R. 776, H.L.(E.) distinguished.

Per Kerr L.J. A claim for an equitable remedy, such as the claim for specific performance in this case, can only be resisted on equitable grounds. The defence must impeach the title to the plaintiff's demand. If it does not do so, then it depends upon the application of the rules of equity whether the plaintiff's equitable claim will be enforced or not. But the existence of a right of set off, whether legal or equitable, does not per se provide a defence to the equitable claim for specific performance so as to defeat it in limine. It only raises an equity in favour of the defendants which, together with all the other circumstances of the case, calls for the exercise of the court's discretionary equitable jurisdiction to refuse an order of specific performance in favour of the plaintiffs and to grant the first defendants relief against forfeiture (post, pp. 258D-E, 259F-H).

Decision of Falconer J. reversed.

The following cases are referred to in the judgments:

Bankruptcy Notice, In re A [1934] Ch. 431, C.A.

Barton Thompson & Co. Ltd. v. Stapling Machines Co. [1966] Ch. 499; [1966] 2 W.L.R. 1429; [1966] 2 All E.R. 222

British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137; [1979] 3 W.L.R. 451; [1979] 2 All E.R. 1063

Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927; [1978] 3 W.L.R. 309; [1978] 3 All E.R. 1066, Kerr J. and C.A.

Hanak v. Green [1958] 2 Q.B. 9; [1958] 2 W.L.R. 755; [1958] 2 All E.R. 141, C.A.

Hughes v. Metropolitan Railway Co. (1877) 2 App.Cas. 439, H.L.(E.)

Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689; [1973] 3 W.L.R. 421; [1973] 3 All E.R. 195, H.L.(E.)

Mondel v. Steel (1841) 8 M. & W. 858

Phipps v. Child (1857) 3 Drew. 709

Rawson v. Samuel (1841) Cr. & Ph. 161

Rickards (Charles) Ltd. v. Oppenhaim [1950] 1 K.B. 616; [1950] 1 All E.R. 420, C.A.

Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] Q.B. 529; [1983] 2 W.L.R. 248; [1983] 1 All E.R. 301, C.A.; [1983] 2 A.C. 694; [1983] 3 W.L.R. 203; [1983] 2 All E.R. 763, H.L.(E.)

Shiloh Spinners Ltd. v. Harding [1973] A.C. 691; [1973] 2 W.L.R. 28; [1973] 1 All E.R. 90, H.L.(E.)

Sport Internationaal Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 W.L.R. 776; [1984] 1 All E.R. 376; [1984] 2 All E.R. 321, C.A. and H.L.(E.)

Starside Properties Ltd. v. Mustapha [1974] 1 W.L.R. 816; [1974] 2 All E.R. 567, C.A.

Stockloser v. Johnson [1954] 1 Q.B. 476; [1954] 2 W.L.R. 439; [1954] 1 All E.R. 630, C.A.

Stooke v. Taylor (1880) 5 Q.B.D. 569, D.C.

The following additional cases were cited in argument:

Dagenham (Thames) Dock Co., In re, Ex parte Hulse (1873) L.R. 8 Ch. App. 1022

Export Credits Guarantee Department v. Universal Oil Products Co. [1983] 2 All E.R. 205, Staughton J. and C.A.; [1983] 1 W.L.R. 399; [1983] 2 All E.R. 205, H.L.(E.)

Sanders v. Pope (1806) 12 Ves.Jun. 282

APPEAL from Falconer J.

By writ of 20 December 1982 and amended on 17 May 1983, and by amended statement of claim served on 23 June 1983, the plaintiffs, B.I.C.C. Plc., claimed against the first defendants, Burndy Corporation, inter alia, specific performance of an agreement in writing between the plaintiffs and the first and second defendants, namely the "assignment" dated 2 November 1981. The plaintiffs sought no relief against the second defendants, B.I.C.C.-Burndy Ltd., who had only been joined as a party to the proceedings because they had been a party to the assignment.

By amended defence of 22 November 1983, the first defendants denied that they were in breach of the assignment agreement, but claimed, in the alternative, relief against that forfeiture of their rights under the assignment to which specific performance thereof would amount. In the further alternative, the first defendants claimed entitlement to set off, at law or in equity, against any sums owed by them to the plaintiffs (the non-payment of which might otherwise entitle the plaintiffs to specific performance of the assignment), a number of much larger sums owed by the plaintiffs to them, under another agreement.

On 27 July 1983, Falconer J. ordered that there be specific performance of the assignment as claimed by the plaintiffs.

By notice of appeal dated 9 November 1983, the first defendants appealed on the grounds, inter alia, (1) that the judge had erred in law in holding that set off was not a defence to the plaintiffs' claim for specific performance; (2) that he had erred in his construction of the assignment; and (3) that, in the alternative, he had erred in holding that the case was not one in which the court had power to grant relief against forfeiture.

The facts are stated in the judgment of Dillon L.J.

Terence Cullen Q.C. and Peter Prescott for the first defendants (Burndy). The parties differ on the construction of clause 10(ii) and (iii) of the assignment. The commonsense view is that the parties were agreeing that, since B.I.C.C. inevitably had to meet the expenses incurred in the day to day management of patent rights belonging to both parties, it was only fair that they could recover half those expenses

from Burndy. Taken together, subclauses (ii) and (iii) can only mean that payment of the sums falling due was a binding contractual obligation; failure to pay would be a default for which the defaulting party might be sued for debt or damages, and risk forfeiting their patent rights.

In fact, at all material times Burndy was not indebted to B.I.C.C. since B.I.C.C. owed Burndy more money in respect of goods sold to them by Burndy under the commercial agreement than the total amount of the invoices in respect of the patent charges. It is also common ground that Burndy's patent rights, which the judge held they had forfeited, are worth many times more than the overdue patent charges. Burndy therefore contend that their patent rights should not be forfeited.

Firstly, because of the incidence of the law of set off, clause 10(iii) is of no application: no sums were "due" in fact, Burndy had not failed to pay, and they were not a "party in default." A court should not decree specific performance arising out of a failure to discharge a debt if at all material times the alleged debtor had a set off exceeding the value of the debt. Since the Statute of Set Off 1735 (8 Geo. 2, c. 24), a party has been entitled to deduct cross-debts notwithstanding that the debts are quite different in nature, provided they are liquidated: see, generally, Stooke v. Taylor (1880); 5 Q.B.D. 569; In re A Bankruptcy Notice [1934] Ch. 431 and Hanak v. Green [1958] 2 Q.B. 9. The existence and amount of the set off must be taken to be known to the plaintiff who should give credit for it in his action against the defendant: see Stooke v. Taylor, 5 Q.B.D. 569, 576, per Cockburn C.J., and Hanak v. Green [1958] 2 Q.B. 9, 23, per Morris L.J. No express or implied agreement to set off is necessary: see Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689. For a creditor's duty to allow for set off in relation to the exercise of contractual rights, see Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, 974B-D, per Lord Denning M.R. For allowance of set off in relation to forfeiture of leases, see British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137.

Further, since specific performance is an equitable remedy, it is only available as a matter of discretion, not of right. Therefore, the party who complains of failure to pay should first have acted justly by giving credit for what was owing by him at the material time: see Spry, Equitable Remedies 2nd ed. (1980), p. 169. The contrary proposition, that a court of equity does not take account of the law of set off when hearing a claim for specific performance, is said to be supported by Halsbury's Laws of England, 4th ed., vol. 42 (1983), para. 440, which itself relies on Phipps v. Child (1857) 3 Drew. 709. But that passage is criticised in Spry and the case cited has nothing to do with the present case, since the debt to Burndy was liquidated, certain, and never in dispute.

Secondly, clause 10(iii) is in the nature of a penalty clause, which the court ought not to enforce. Its purpose was to induce payment of patent agency charges by putting a party in peril of losing their patent rights. Equity has always been ready to strike down clauses which penalise a party in breach of a contract instead of providing for genuine compensation; neither were penalties recoverable at common law: see

McGregor on Damages, 14th ed. (1980), at p. 244. Though a penalty clause usually calls for the forfeiture of a large sum of money in the event of a breach, it is immaterial that clause 10(iii) differs only in that the penalty consists in money's worth. A pound of flesh may be a penalty, it does not have to be a pound sterling: see In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) L.R. 8 Ch.App. 1022. In the present case, an amount of damages representing the value of the patent rights would be worth many times more than the sums Burndy allegedly failed to pay, and would clearly bear no relation to any actual loss that B.I.C.C. can claim to have sustained. In holding that clause 10(iii) was not a penalty clause the judge wrongly relied on Export Credits Guarantee Department v. Universal Oil Products Co. [1983] 1 W.L.R. 399, where the sum claimed was not a penalty but accurately reflected the loss sustained by the plaintiff.

Third, if we are wrong about set off, and about the penal nature of clause 10(iii), then this is a case were equity should intervene to extend the time for payment of the sums due, since these are modest in comparison with the value of the property which Burndy stand to lose otherwise. That equity has power so to extend time is well settled: see In re Dagenham (Thames) Dock Co., Ex parte Hulse, L.R. 8 Ch.App. 1022 and Stockloser v. Johnson [1954] 1 Q.B. 476, 496, per Romer L.J. And in Starside Properties Ltd. v. Mustapha [1974] 1 W.L.R. 816, Cairns L.J. held that the rule was not confined to cases about rent, and referred approvingly to Barton Thompson & Co. Ltd. v. Stapling Machines Co. [1966] Ch. 499, a case about chattels. An extension of time would be appropriate in this case for several reasons. There has never been any question of Burndy being unable to find the money. Clause 10(iii), unlike the clause in the Dagenham Dock case, does not express time to be of the essence. Even if Burndy's right to set off is not a complete defence in its own right, it is undisputed that they were at all material times in credit on net account. Refusal of relief would produce hardship and equity should intervene to avoid hardship: Sanders v. Pope (1806) 12 Ves.Jun. 282.

Relief against forfeiture is not restricted to proprietary rights in land but extends to any proprietary rights: Sport Internationaal Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 W.L.R. 776. The distinction between a litigant seeking to recover property that has been forfeited as opposed to defending the retention of property is recognised in penalty cases: see the Starside Properties case [1974] 1 W.L.R. 816, 824G-H. Even if clause 10(iii) is not a penalty, Burndy is not precluded from invoking the aid of equity in answer to B.I.C.C.'s plea for equitable relief, notwithstanding that Burndy's interest is not in land. As Burndy here is not seeking relief against forfeiture, i.e. the reinstatement of its former rights, the relief afforded by equity would be that held by Romer L.J. in Stockloser v. Johnson [1954] 1 Q.B. 476 to be the basis of the decision in the Dagenham Dock case, namely the extension of time. However, the intervention of equity is a matter for the exercise of the court's discretion. The judge below did not exercise a discretion, for he held that he did not possess one.

Finally, the judge was wrong to hold that the rights to be assigned should not be subject to the licence granted to Burndy-Electra. A patent licence is personal property: see the Patents Act 1977, section 30(4)(b). What clause 10(iii) requires to be assigned is "all the rights and benefits in" the patents, which must mean in this case all the rights and benefits enjoyed by Burndy - i.e. not an untrammelled half share of the patents, but one subject to a licence in favour of a third party, Burndy-Electra. In response to this, B.I.C.C. sought to rely on section 33 of the Patents Act 1977 which, when it operates, has a "second come, better served" effect. The judge was mistaken in supposing that it was Burndy who needed to rely on this section, and he erred in law in applying it to this case.

The second defendants (Burndy-Electra) did not appear and were not represented.

Stephen Gratwick Q.C. and Simon Thorley for the plaintiffs (B.I.C.C.). The judge was correct and his decision is to be supported. Clause 10(i), (ii) and (iii) provide machinery for the administration of the patent rights, B.I.C.C. to have prime responsibility for custody of documents, liaison with patent offices and payment of fees. Clause 10(iii) enables either party to divest itself of rights in which it is not or is no longer interested, and of the corresponding obligations, with an absolute minimum of action of its part. By reason of clause 9(a), B.I.C.C. will need to give notice of its wish to abandon rights; Burndy will not. No consultation is necessary and delay caused by consultation is avoided. There is no express or implied obligation on Burndy under clause 10(ii) or elsewhere in the assignment to pay the half share to B.I.C.C. and B.I.C.C. could not have brought an action for the money. Clause 10(ii) and (iii) do not generate a debt and a right to sue for a debt. They provide only a machinery for regulating the interests of the parties in the patents and the incidence of payment therefor. The foregoing construction does not impose an onerous burden on Burndy - only that the person responsible for payment be told of the time provision: see Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] Q.B. 529. Time is clearly of the essence of clause 10(iii).

The contention that clause 10(iii) generates a debt, a right to sue for payment, and a penalty for non payment is wrong. The terms "party in default" and "party not in default" do not operate to turn a non payment into a debt recoverable by action: they are merely convenient terms for identifying which of the two parties has not made the payment, and to make it possible thereby to use a single set of words to define the mutual rights and obligations when such payment has not been made. Clause 10(iii) is not a clause creating an actionable debt with a provision for securing its payment, i.e. it is not a clause for securing the payment of money.

The plea of set off in this action is misconceived. A plea of set off at law only has a place in an action claiming money: e.g. unpaid rent. It has no place in an action for specific performance of an agreement: see Halsbury's Laws of England, 4th ed., vol. 42, paras. 406 and 440, and Phipps v. Child, 3 Drew. 709. The doctrine has no application to the

construction of an agreement. It is open to the parties, if they so wish, to agree that the consequences of non payment under one provision are different from the consequences of non payment under another provision. There is no room in the present agreement for an implied term and the law does not impose on the contracting parties a provision at variance with that which they have agreed. In any case, in modern conditions it would be commercially unviable for a multi-national company to know what claims, if any, might or might not lie against it which might be the basis of legal set off, or whether any particular debtor sued might have such a claim.

On a proper construction of clause 10(iii) in the context of the assignment as a whole, it cannot be said that Burndy were entitled simply to do nothing in response to a valid claim for payment by B.I.C.C. under clause 10(ii) and then to rely on the overall state of accounts between the parties, not arising under the terms of the assignment, as an answer to B.I.C.C.'s claim to invoke a transfer of the joint rights under clause 10(iii). The dictum of Cockburn C.J. in Stooke v. Taylor, 5 Q.B.D. 569, cannot be applied to clause 10(iii) because B.I.C.C. are not claiming payment of sums due under the assignment or seeking to enforce such a claim by action. Nothing in Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927 or British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137 suggests that set off can be relied on by way of unconnected claims.

The only basis on which, in equity, Burndy can properly claim to be relieved of the consequences of the events which have happened is under the doctrine of relief against forfeiture, if applicable. A claim for an equitable remedy can only be resisted on equitable grounds: see Rawson v. Samuel (1841) Cr. & Ph. 161. The existence of a right of set off does not per se provide a defence to the equitable claim for specific performance: see the Federal Commerce case. A right of set off, whether legal or equitable, cannot therefore operate as a bar to the present claim for specific performance. It can only operate where the claim to set off provides equitable grounds for equity to intervene, when it becomes a matter of discretion whether the equitable relief claimed should be refused or whether equity should intervene in some other way. One such way would be relief against forfeiture.

However, the judge below rightly held that he had no jurisdiction to grant relief against forfeiture because clause 10(iii) was part of a commercial agreement entered into between commercial parties bargaining at arm's length: see Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana [1983] Q.B. 529. And since the judgment below, both the Court of Appeal and the House of Lords have given judgment in Sport Internationaal Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 W.L.R. 776. The principles on which that case was decided are equally applicable to the present complex of agreements for dissolving the previous joint enterprises of B.I.C.C. and Burndy and for regulating their mutual and separate rights and obligations thereafter. The rights involved are contractual, not proprietary. The present case is thus not

appropriate for relief against forfeiture and the judge's appraisal of the question was not in error.

The judge rightly held that any assignment to B.I.C.C. would not be subject to the Burndy-Electra licence. On its true construction the principal agreement put an end to that licence or prevented any rights accruing to Burndy-Electra thereunder. If it did not, the judge correctly interpreted section 33 of the Patents Act 1977. To interpret it as the appellants contend would enable them to take advantage of their failure to assign timeously.

Cullen in reply.

13 July. The following judgments were handed down.

DILLON L.J. This is an appeal against a decision of Falconer J. given on 27 July 1983. The appellants, the Burndy Corporation ("Burndy") who are the first defendants in the action, are a substantial United States company particularly concerned in the manufacture and sale of electrical and electronic connectors. The respondents, B.I.C.C. Plc. ("B.I.C.C.") who are the plaintiffs in the action, are a substantial British company particularly concerned with the manufacture and sale of cables and wires.

In 1959, at a time when Burndy, though substantially established in the United States and elsewhere, had no significant position in the United Kingdom market, and B.I.C.C. had not been concerned with electrical or electronic connectors, the two companies decided to form a 50:50 company in the United Kingdom, essentially, as it is put in the evidence, to exploit the know-how and rights which Burndy had in the connector field by the involvement in the United Kingdom and certain parts of the British Commonwealth of the extensive existing marketing force of B.I.C.C. The company so formed was called initially B.I.C.C.-Burndy Ltd. (referred to as "B.B.L."); though formally joined in the action as a second defendant, B.B.L. has played no part in the trial or at the hearing of this appeal.

In or about 1979, B.I.C.C. and Burndy decided to dissolve their joint relationship so that both companies would be left to compete freely throughout the world in the connector business. Such an unscrambling of a joint relationship which had lasted for about 20 years raised a considerable number of practical problems, and to resolve these a series of, as the judge put it, closely related interlocking and detailed agreements running to some 120 pages was entered into. Basically, there was an offer by B.B.L. to sell its manufacturing business to B.I.C.C. for a substantial sum and, in the event, which happened, that that offer was accepted, four other agreements were to have effect, which are referred to as: (1) the "principal agreement," (2) the "commercial agreement," (3) the "assignment" and (4) the "ancillary agreement." On this appeal we are concerned especially with the assignment, but it is relevant to note that the commercial agreement provided, among other things, for the continued sale of goods by Burndy to B.I.C.C. and by B.I.C.C. to

Burndy on terms which were fixed in considerable detail by the commercial agreement.

The assignment, which is dated 2 November 1981 and was made between B.B.L. (1), B.I.C.C. (2) and Burndy (3), was concerned with patent and other rights included in the definition of the "joint rights" hereinafter mentioned. The background to the assignment was that, during the continuation of the joint relationship, numerous patent applications had been made and patents had been acquired in the name of B.B.L., mainly in the United Kingdom but also elsewhere. Since these patents and patent applications depended in large part on the know-how and experience of Burndy and on research done by Burndy, it was not appropriate that they should be acquired by B.I.C.C. absolutely, with the manufacturing activities of B.B.L., to the entire exclusion of Burndy. What was arranged was therefore, basically, that these various rights should be vested in B.I.C.C. and Burndy jointly with complete freedom for each of them to use and exploit the rights. It was for this purpose that the assignment was entered into. The important clauses for the purposes of this appeal are clauses 9 and 10 - particularly clause 10 - but it is convenient to summarise all the major provisions of the document.

Clause 1 contains a definition of the "joint rights" as meaning, in brief, all United Kingdom and overseas patents and registered designs and applications therefor, copyright in literary and artistic work and all other rights in inventions and discoveries, including information as to improvements, processes, formulae, trade secrets and other know-how relating thereto which were part of the assets of B.B.L. and used by it for the purposes of its business.

By clause 3.1 in consideration of a payment by B.I.C.C. which appears to have been of no special significance, B.B.L. assigned to B.I.C.C. and Burndy jointly and absolutely all B.B.L.'s right title and interest to and in the joint rights. By clause 7 these were to be held by B.I.C.C. and Burndy in equal undivided shares.

By clause 8 B.I.C.C. and Burndy agreed that each of them should be entitled: (a) to assign its share in or grant non-exclusive licences in respect of any of the joint rights to any person or persons without the consent of the other of them; and (b) to exercise or exploit in any other manner any of the joint rights for its own profit without accounting to the other of them.

Clause 9 contained mutual covenants between B.I.C.C. and Burndy as follows: (a) not to do or omit to do or permit any act or thing whereby the protection granted by the law of any jurisdiction in which any of the joint rights subsisted should be in any way lessened or avoided; (b)(i) to notify the other of any infringement or threatened infringement by a third party of or proceedings for revocation, cancellation or rectification affecting any of the joint rights; (ii) to consult with the other regarding mutual commencement of proceedings to prevent such infringement or to defend such proceedings for revocation, cancellation or rectification and if agreed to institute or defend such proceedings at their joint expense and for their joint benefit, but so that if they did not agree on the joint institution or joint

defence of proceedings either might act at its own expense and retain for its own benefit any damages costs and other compensation recovered; (c) not to make any application or motion to amend the specification of any patent comprised in the joint rights without the other and that the costs of any such joint application or motion should be borne by the parties in equal shares; and (d) to consult with the other regarding the registration of or the extension of the term of any of the joint rights and if agreed to take any proceedings for such registration or extension at their joint expense but so that, if one of the parties should be unwilling to take such proceedings, it should assign to the other without payment all its right title and interest to and in such of the joint rights to which such proceedings would relate and should do all other things required by the other party to obtain and enjoy such registration or extension and the full sole and exclusive benefit thereof.

Clause 10 provided by sub-clause (i) that B.I.C.C. should hold all documents relating to the joint rights, and there was the usual acknowledgement for production and undertaking for safe custody. Sub-clauses (ii) and (iii) of clause 10 then provided:

"(ii) B.I.C.C. shall be primarily responsible for the processing and maintaining of applications and patents forming part of the joint rights and the making of payment of costs and fees in respect thereof (including the normal and reasonable charges of B.I.C.C.'s patent and licensing department) subject to reimbursement of one half thereof by Burndy and B.I.C.C. shall give Burndy sufficient notice of any application or motion which it may be necessary or desirable to make under sub-clauses (c) or (d) of clause 9 hereof. (iii) If B.I.C.C. shall fail to pay all or Burndy fail to reimburse B.I.C.C. one half of the costs and fees incurred by B.I.C.C. under paragraph (ii) above in the case of B.I.C.C. when payment is due and in the case of Burndy within 30 days of a written request therefor the other party not in default shall be entitled to require the party in default to assign to it all the rights and benefits in any patent or application in respect of which such payments were due and at the request and cost of such other party the assigning party shall if necessary furnish such information and execute and do all such documents and acts as may reasonably be required to enable such other party to obtain and enjoy the full sole and exclusive benefit thereof."

It is B.I.C.C.'s case in this action, which the judge has upheld, that Burndy failed to reimburse one half of the costs and fees incurred by B.I.C.C. under clause 10(ii) in respect of a large number of patents and patent applications included in the joint rights within 30 days of written request as prescribed by clause 10(iii) and that B.I.C.C. is accordingly entitled under clause 10(iii) to an assignment of all Burndy's rights and benefits in such patents and applications. It is common ground and not in doubt that Burndy never intended to give up any of its rights in any of the patents or patent applications, but it is claimed by B.I.C.C., and was held by the judge, that Burndy has irrevocably lost its rights by

failing to pay timeously the relatively small amounts of costs and fees involved.

Before, however, I attempt to summarise the arguments on each side, I must briefly set out the remaining facts. During the subsistence of the joint relationship before the assignment was entered into, there had been fees and expenses incurred by B.I.C.C. for the maintenance of certain overseas patents and it had been the practice of B.I.C.C. to invoice Burndy for Burndy's half share of those fees and expenses. The person in Burndy responsible for dealing with those invoices was Mr. Reiter, Burndy's patent counsel, and the man in B.I.C.C. with whom he dealt was Mr. Ross-Gower, a chartered patent agent. Mr. Reiter considered it his duty to check the invoices as far as he could, because apparently, on one occasion, a charge had been raised which had been withdrawn when challenged; the details do not matter.

When the assignment took effect, B.I.C.C. continued in respect of the costs and fees incurred by it under clause 10(ii), the practice of submitting periodic invoices to Burndy, and it remained the duty of Mr. Reiter to deal with those invoices. Details of the invoices submitted are as follows:

No. of invoice          Date                    Amount
P.S. 27                 25 January 1982         £728 
P.S. 81                 21 April 1982           £2,701.68 
P.S. 125                19 July 1982            £3,519.74 
P.S. 165                18 October 1982         £2,181.29 

None of these invoices was paid or commented on in any way by Burndy, save for an early comment by Mr. Reiter to Mr. Ross-Gower that there did not seem to be enough information in the invoices for them to be checked. The reason for this inactivity on the part of Burndy was that Mr. Reiter, who was unaware of the terms of clause 10(iii), was heavily occupied with other matters and did not make time available to deal with B.I.C.C.'s invoices. Follow-up letters asking for prompt settlement of the invoices were sent by B.I.C.C. on 19 May, 6 and 20 July and 18 August 1982, but it is a matter of fact, whether relevant or not, that these letters did not suggest any special urgency or refer to clause 10(iii). On the personal level as between Mr. Ross-Gower and Mr. Reiter, the relationship was very cordial.

In October 1982, Mr. Reiter found that he would have an opportunity to come to London in relation to some other business and so by a telex of 12 October he proposed a meeting with Mr. Ross-Gower on Tuesday 19 October "to meet and resolve outstanding billing questions." That meeting was accepted by B.I.C.C. and on 18 October Mr. Reiter arrived in London. On the same day B.I.C.C. sent to Burndy a telex and a confirmatory letter invoking clause 10(iii) and calling on Burndy to assign to B.I.C.C. all Burndy's interest in all the patents and applications to which the costs and fees the subject of the earlier invoices related. On the same day B.I.C.C. sent to Burndy a further invoice, noted above, in respect of further costs and fees incurred by B.I.C.C. under clause 10(iii) in the previous three months; some of these related to the same patents as some of the earlier invoices.

The meeting arranged between Mr. Reiter and Mr. Ross-Gower for the 19 October did not, in the event, take place, because Mr. Reiter was ill on the 19th. Instead, he spoke to Mr. Ross-Gower by telephone and gave a somewhat nebulous assurance that he expected to authorise paying the invoices when he returned to his office, and would complain about them later if he later found out that they were wrong. In fact, nothing further was done on Mr. Reiter's return to the United States. On 22 November 1982, B.I.C.C. wrote to Burndy again, invoking clause 10(iii) and calling for an assignment of Burndy's interest in the patents and patent applications to which the invoice of 18 October related. Mr. Reiter then telephoned Mr. Ross-Gower, but was told by him that the matter was out of his, Mr. Ross-Gower's, hands, and on 20 December 1982 the writ in this action was issued by B.I.C.C.

By the time of the trial of the action it was accepted by Burndy that all the invoices of B.I.C.C. listed above were correct and that the sums claimed in these invoices were properly claimed. Conversely, it is accepted by B.I.C.C. that Burndy was at all times in a position, financially, to pay those invoices. More importantly, it is expressly admitted by B.I.C.C. that, at all material times, B.I.C.C. owed Burndy liquidated sums very substantially in excess of the total amount of the invoices, for goods sold to B.I.C.C. by Burndy under the commercial agreement; a total indebtedness of B.I.C.C. exceeding £100,000 was mentioned.

The differences between the parties as to the issues of law involved in this case start with a difference as to the purpose and effect of clause 10(iii) of the assignment.

Mr. Gratwick submitted on behalf of B.I.C.C., and the judge accepted, that the purpose of clause 10(iii) was to provide a simple mechanism whereby, if either party should not be interested in proceeding with a particular patent in a particular country, or in maintaining a particular patent in a particular country and, therefore, was unwilling to pay towards the cost thereof, that party could divest itself of the responsibility therefor by doing nothing and the particular patent application or patent would go to the other, and interested, party wholly. In the court below Mr. Gratwick pointed to clause 10(iii) as a simple mechanism that avoided any need for consultation between the parties concerning any particular right. Mr. Gratwick further submitted that to claim an assignment of Burndy's rights under clause 10(iii) was the only remedy available to B.I.C.C. in the event of failure by Burndy to pay its half share of any costs and fees incurred by B.I.C.C. under clause 10(iii) because, as Mr. Gratwick submitted, there was no express or implied obligation on Burndy under clause 10(ii) or elsewhere in the assignment to pay the half share to B.I.C.C. So, it was submitted, B.I.C.C. could not have brought an action for the money.

By contrast, Mr. Cullen on behalf of Burndy submitted that there was an obligation on Burndy to reimburse to B.I.C.C. Burndy's half share of the costs and fees paid by B.I.C.C. and, if all other things had been equal, an action to recover the money would have lain against Burndy. From this, Mr. Cullen sought to make three main points in the

court below and in this court, as follows (and I do not list the points in the order in which he put them).

1. The purpose of clause 10(iii) was merely to provide a sanction for the non-payment of the half share of costs and fees due from Burndy, and so clause 10(iii) ought to be regarded as a penalty clause, and ought not to be enforced by a court of equity, because the value to Burndy of the patent rights involved could, and probably would, be very great compared with the amount of the unpaid costs and fees. The judge held that the clause was not a penalty clause.

2. Liability to execute an assignment of rights under clause 10(iii) depended on Burndy being in default, and Burndy never was in default in payment of the share of costs and fees because, at all times, Burndy had available a right of legal set off in view of the much higher sums due from B.I.C.C. to Burndy under the commercial agreement. As to this, the judge held that, as the claim in the action against Burndy was for specific performance of an agreement to execute an assignment, no defence of set off could lie; but this does not completely answer Mr. Cullen's point, which is that, because of the right to a legal set off of a larger liquidated sum, the right to specific performance and to have the assignment never arose.

3. In the alternative, Mr. Cullen submitted that clause 10(iii) was a forfeiture clause, the enforcement of which would deprive Burndy of property rights - viz., its undivided half interest in the relevant joint rights - and he asked for relief against forfeiture by the extension of time for payment. As to this, the judge held, in reliance on the judgment of the Court of Appeal in Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] Q.B. 529, that he had no jurisdiction to grant relief against forfeiture because clause 10(iii) was part of a commercial agreement entered into between commercial parties bargaining at arm's length. He further held that, even if he had had jurisdiction, he would, in the exercise of his discretion, have refused relief; I refer to his reasoning below.

Finally, there is a separate point which Mr. Cullen takes if he fails on all other points. This is that any assignment ordered against Burndy should be subject to a licence under all relevant patents granted by Burndy in 1961 to its Belgian subsidiary, Burndy-Electra S.A., and since extended (but before the execution of the principal agreement and not by any express exercise of Burndy's power to grant licences under clause 8 of the assignment). This point raises two issues. The first, as to which it is not clear whether the judge came to a conclusion or not, is whether any licence granted to Burndy-Electra survived the execution of the principal agreement and the assignment; this depends on the effect of certain provisions of those documents which I have not so far set out. The second issue is whether the judge was right in holding that B.I.C.C. is entitled to the protection of section 33 of the Patents Act 1977 against any claims of Burndy-Electra since B.I.C.C. had no notice of any licence to Burndy-Electra when B.I.C.C. called for the assignment of the joint rights under clause 10(iii), although B.I.C.C. did have notice of the licence (assuming it to subsist) from the pleadings and from the course of the trial before the execution of any assignment of the rights

by Burndy, or the making of any order of the court vesting those rights in B.I.C.C.

The construction and effect of clause 10 of the assignment

I do not accept the submission of Mr. Gratwick that the purpose of clause 10(iii) was to provide a simple mechanism whereby any party not interested in proceeding with a particular patent or application could divest himself of all responsibility by doing nothing. Equally, I do not accept his submission that clause 10(iii) is the only remedy available to B.I.C.C. if Burndy fails to pay its half share of fees and costs, and B.I.C.C. has no right of action to recover the money.

If B.I.C.C. had failed to pay the fees required to maintain a patent in force and Burndy, learning of the failure, had paid to the Patent Office the sum required to restore the patent, Burndy would clearly, in my judgment, have been entitled to recover one half of the sum from B.I.C.C. as damages for breach, as I see it, of B.I.C.C.'s obligation under clause 10(ii) or, as I think Mr. Gratwick would accept, for breach of B.I.C.C.'s obligation under clause 9(a). The right of Burndy to claim an assignment under clause 10(iii) would be an additional or alternative remedy. It would be startling, therefore, if the right to claim an assignment under clause 10(iii), which was merely an additional or alternative remedy in the event of a default by B.I.C.C., was the sole remedy available to B.I.C.C. in the event of a default on the part of Burndy.

The obligation on B.I.C.C. under clause 10(ii) to pay the requisite costs and fees is expressly subject to reimbursement of one half of the amount by Burndy. That, in my judgment, imports an implied contract by Burndy under clause 10(ii) to pay B.I.C.C. one half of the amount of the costs and fees. Alternatively, the one half of the amount could be recovered by B.I.C.C. from Burndy in quasi-contract as money paid to the use of Burndy on the basis that Burndy, having taken the benefit of the payment by accepting that the patent concerned is maintained in force, is bound, under the words "subject to reimbursement," to bear the burden and can be sued for one half of the costs and fees.

As to the purpose of clause 10(iii), the clause, in my judgment, plays a sensible part, even though that part has not been fully thought out in all details, in the scheme of the assignment in dealing with the joint rights. The joint rights are to be jointly owned and each party is to have a full independent right to exploit them. But, just as under clause 9(d) a party who is not prepared to pay its share of the costs of obtaining an extension or registration of a particular patent is to assign all its interest to the other party, so equally it is commercial sense that under clause 10(iii) a party who fails to pay its share of the costs and fees required to process a patent application or keep a patent alive may be required to give up to the other party all the first party's interest in the particular patent or application.

It may be that, in a particular set of circumstances, clause 10(iii) will operate as a simple mechanism to enable a party to divest itself of all rights and liabilities in respect of a patent or application in which that

party is not, or is no longer, interested. That is not, however, either the purpose of, or the limitation on, the operation of clause 10(iii).

Mr. Gratwick urges that the conclusion that the amount of fees can be sued for leads to the conclusion that the party who no longer desires the continuation of a particular patent or application cannot, as of right, absolve himself from liability. That may be so. If it is so, it is because the draftsman of the clause - relying, no doubt, on a certain commercial common sense in the parties - had not thought of the difficulty. Had he thought of the difficulty, the answer would have been some form of put option to counter-balance clause 10(iii).

Penalty

It follows from the views expressed above as to the sensible purpose of clause 10(iii) that the clause is no more a penalty clause than is the ordinary power of re-entry in a lease or the ordinary provision in a patent licence to enable the patentee to determine the licence, however valuable, in the event of non-payment of royalties by the licensee. It is unnecessary to elaborate this point, which is separate from the questions whether relief against forfeiture can, or should, be granted.

Set Off

At the outset of his authoritative exposition of the law of set off in Hanak v. Green [1958] 2 Q.B. 9, 16, Morris L.J. cited the statement by Lord Hanworth M.R. in In re A Bankruptcy Notice [1934] Ch. 431, 437, that the word "set off"

"is a word well known and established in its meaning; it is something which provides a defence because the nature and quality of the sum so relied upon are such that it is a sum which is proper to be dealt with as diminishing the claim which is made, and against which the sum so demanded can be set off."

Morris L.J. went on to explain that there were three forms of set off recognised by the law. The first is set off at law, or legal set off as it is sometimes called, of mutual debts under the Statutes of Set Off 1729 (2 Geo. 2, c.22) and 1735 (8 Geo. 2, c.24), where the claims on both sides have to be liquidated debts or money demands which can be ascertained with certainty at the time of pleading. This is the form of set off relied on in the present case. The second form of set off arose as explained by Parke B. in Mondel v. Steel (1841) 8 M. & W. 858, and was a development of the common law; where an action was brought for an agreed price of a specific chattel sold with a warranty or a work which was to be performed according to contract, the defendant was allowed to plead by way of defence in reduction of the claim that the chattel, by reason of non-compliance with the warranty, or the work in consequence of the non-performance of the contract, was diminished in value. The third form of set off, often referred to as equitable set off, arose in cases in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff's claims; these were particularly cases where the cross-claim was related to the subject matter of the claim and there were factors which

would have rendered it unjust in the eyes of equity that the claim should be enforced without regard to the cross-claim.

These various forms of set off arise by operation of law or equity. They do not depend on finding any express or implied contract between the parties that there shall be set off; the position is the other way round. As Lord Diplock observed in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717 a case of the second class:

"It is, of course, open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law or such remedy may be excluded by usage binding upon the parties.... But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption."

These words seem to me, equally, if not a fortiori, applicable to legal set off of the first class, which originally arose by statute.

In discussing legal set off of the first class in Hanak v. Green [1958] 2 Q.B. 9, 23, Morris L.J. approved the explanation of the basis of the doctrine given by Cockburn C.J. in Stooke v. Taylor (1880) 5 Q.B.D. 569, 576, that the existence and amount of such a set off must be taken to be known to a plaintiff who should give credit for it in his action against the defendant. In the present case, therefore (as Mr. Gratwick accepts), if B.I.C.C. had sued Burndy for the unpaid amount of Burndy's half share of the fees and costs incurred by B.I.C.C. under clause 10(ii) of the assignment, Burndy would have had a cast iron defence of legal set off in respect of the amounts due from B.I.C.C. to Burndy under the commercial agreement and B.I.C.C.'s action would have been dismissed with costs.

The crucial question is that, as I see it, whether, even though a claim for payment would fail because of a defence of set off, a claim for other relief dependent upon non-payment can succeed. I cannot see that it can make any difference in substance whether procedurally the claim for the other relief is joined in one action with the claim for payment to which the set off is a valid defence, or whether only the other relief is claimed, leaving the claim for payment to be raised in a subsequent action or to be resolved by the application of the set off.

There are two reported cases which I find helpful on this point of law. Both were concerned with equitable set off, i.e. set off of the third class. In Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, Lord Denning M.R. said, at p. 974:

"Again take the case where the contract gives a creditor a right to take the law into his own hands - to take a particular course of action if a sum is not paid - such as to forfeit a lease for non-payment of rent, or to withdraw a vessel for non-payment of hire. There the distinction between set off and cross-claim is crucial. When the debtor has a true set off it goes in reduction of the sums owing to the creditor. If the creditor does not allow it to he

deducted, he is in peril. He will be liable in damages if he exercises his contractual right of withdrawal wrongly."

From this passage, which I am happy to take as a correct statement of the law (although, despite the generality of the wording, I take it as referring to equitable set off only, since equitable set off was the only class of set off under consideration in the Federal Commerce case), it clearly follows, in my judgment, that if in the present case Burndy had had an equitable rather than a legal set off against B.I.C.C., B.I.C.C. would not have been entitled to call under clause 10(iii) of the assignment for an assignment of Burndy's patent rights.

Similarly, in British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137, where there was a claim for unpaid rent and for forfeiture of leasehold premises for non-payment of the rent, it seems to have been common ground that an equitable set off against the rent, if established, would have been a defence to both claims. I cannot think that it would in principle have made any difference if the claim had been made for forfeiture and possession of the premises only, without including in the same writ a claim for the unpaid rent; the claim for forfeiture and possession depended on the rent being unpaid, just as the claim for an assignment of patent rights under clause 10(iii) in the present case depends on Burndy's half-share of the fees and costs under clause 10(ii) not having been paid.

I cannot see that it makes any difference in principle that the set off in the present case is a legal set off of the first class and not an equitable set off. The would-be plaintiff - here B.I.C.C. - is, as Cockburn C.J. in Stooke v. Taylor, 5 Q.B.D. 569, 576 and Morris L.J. in Hanak v. Green [1958] 2 Q.B. 9, 23 explained, to be taken to know the existence and amount of liquidated money claims against it, and that must be equally applicable whether the plaintiff is seeking to claim payment of a sum or some other relief which is dependent on non-payment of that sum.

Mr. Gratwick submits that in modern conditions it would be commercially impracticable for a multi-national company to know what claims, which could be the basis of legal set off, an apparent debtor may have against it. They may be claims through different branches in different countries and not merely, as here, claims under another of a group of interlocking agreements. But the argument, if valid, would apply to money claims of B.I.C.C. against Burndy as much as to claims for other relief, and in relation to any money claim for the half-share of costs and fees under clause 10(ii) it is accepted that set off would, on the admitted facts, be a complete defence.

In my judgment, therefore, on the point of set off Burndy has a valid and complete defence to this action.

I have had the opportunity of reading in draft the judgment of Kerr L.J. and I note that he does not agree with my conclusion that Burndy has a defence to this action on the point of set off. He takes the view that a right to set off, whether legal or equitable, does not operate as a bar to a claim for equitable relief, such as B.I.C.C.'s claim for specific performance, as it would in relation to a monetary claim; it is only relevant if the claim to set off provides equitable grounds for equity to

intervene on a discretionary basis, as by refusing the equitable relief claimed or granting some other equitable relief, e.g., by way of relief against forfeiture.

Before the Supreme Court of Judicature Act 1873 (36 & 37 Vict. c.66), set off of any sort would almost invariably only have arisen in relation to claims in the common law courts for payment of money. Equitable relief would only have come in in a rather different, and purely procedural, context, viz. that in the form of set off known as equitable set off, to which Lord Cottenham L.C. referred in Rawson v. Samuel (1841) Cr. & Ph. 161, 178 where set off at law, i.e., under the statutes, was not available, but the court of equity felt that the defendant to an action at law ought, because of a cross-claim, to be protected against the action at law, that court would have granted the equitable relief of an injunction to restrain the claimant at law from enforcing his claim at law.

It seems that the only case in the books in which a plea of set off was sought to be raised by a defendant to a claim for equitable relief in the Court of Chancery was Phipps v. Child (1857) 3 Drew. 709, where a purchaser, who was defendant to an action for specific performance of a contract for the sale of an interest in land, sought unsuccessfully to reduce the purchase money due from him by setting off the unquantified balance allegedly due to him from the vendor in respect of other dealings, and sought equally unsuccessfully to resist specific performance of the contract until that balance had been established. The judgment does not, however, as I read it, lay down any general principle which is relevant now, and the set off asserted by the purchaser would not have fallen within any of Morris L.J.'s three categories: see the comments in Spry, Equitable Remedies, 2nd ed. (1980), p. 171.

It is now clear that, since the Supreme Court of Judicature Act 1873, equitable set off can, like the first and second of Morris L.J.'s three categories, be pleaded as a defence where appropriate to proceedings, whether at law or in Chancery. Equally, since that Judicature Act, equitable forms of relief, such as a decree for specific performance or an injunction, can be obtained in any division of the High Court and can be combined in one action with a claim for payment of money.

It seems to me right that, under the present practice, a set off should be a defence, as in such a case as British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137, not only to a money claim for unpaid rent but also to a claim for forfeiture or other relief for non-payment of the rent. It would make no difference if the re-entry clause had been backed by an agreement by the tenant to surrender the lease in the event of non-payment of rent, and the landlord had sought specific performance of that agreement.

The essence of an equitable set off is that equity considered it unjust that a claimant should seek to enforce a claim without giving credit for a related cross-claim which the defendant had against him. The logic of the argument makes the defence of equitable set off equally applicable, under modern procedure, whatever form of relief, legal or equitable, the plaintiff is claiming, provided that that relief depends on the non-payment of the money claim to which the equitable set off is a complete

defence. That, as I understand him, is what Lord Denning M.R. was saying in the passage in his judgment in Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, 974, quoted above.

But, if the equitable set off can be a good defence to a claim for equitable relief, then I cannot see why legal set off should not also be a good defence, since legal set off was authorised by statute and equitable set off was developed from it.

Relief against forfeiture

If I am wrong in my view on Burndy's defence of set off, it becomes necessary to consider Burndy's claim for relief against forfeiture. Even though, as indicated above, I take the view that clause 10(iii) of the assignment is not a penalty clause, it is a forfeiture clause in that its enforcement would involve the forfeiture to B.I.C.C. of Burndy's half share in the relevant patent or other joint rights.

There are here two questions, viz.: has the court jurisdiction to grant Burndy relief against forfeiture by an extension of time; and, if so, is it appropriate that the court should exercise that jurisdiction in Burndy's favour?

The judge decided, in reliance especially on the judgment of the Court of Appeal in Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] Q.B. 529, that the court had no such jurisdiction, because the assignment was a commercial agreement between commercial parties. The decision of the Court of Appeal in The Scaptrade was, as the judge noted, affirmed by the House of Lords [1983] 2 A.C. 694. As I understand the decision of the House of Lords, however, and the decision of the House of Lords in the subsequent case of Sport Internationaal Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 W.L.R. 776, their effect was to confine the court's jurisdiction to grant relief against forfeiture to contracts concerning the transfer of proprietary or possessory rights: see the speech of Lord Templeman in the latter case at p. 794. The present case, however, is distinguishable from those cases in that clause 10(iii) of the assignment is concerned with a transfer of property rights.

In Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, the House of Lords held that the court had jurisdiction to grant relief against forfeiture of proprietary rights in circumstances outside the ordinary landlord and tenant relationship; but the case was concerned with a claim for relief against a right of re-entry on land, and the speeches do not cast light on the extent to which jurisdiction exists to grant relief against forfeiture of property other than an interest in land. In Barton Thompson & Co. Ltd. v. Stapling Machines Co. [1966] Ch. 499, 509, Pennycuick J. considered it to be arguable that relief could be granted against forfeiture of a lease of chattels. That view seems to have been approved by Edmund Davies L.J. in Starside Properties Ltd. v. Mustapha [1974] 1 W.L.R. 816, 822; and in Stockloser v. Johnson [1954] 1 Q.B. 476, 502, Romer L.J. apparently considered that the court would have power in an appropriate case to grant relief by way of extension of time to a purchaser of a diamond necklace who had failed to pay the final instalment of the price in due time.

There is no clear authority, but for my part I find it difficult to see why the jurisdiction of equity to grant relief against forfeiture should only be available where what is liable to forfeiture is an interest in land and not an interest in personal property. Relief is only available where what is in question is forfeiture of proprietary or possessory rights, but I see no reason in principle for drawing a distinction as to the type of property in which the rights subsist. The fact that the right to forfeiture arises under a commercial agreement is highly relevant to the question whether relief against forfeiture should be granted, but I do not see that it can preclude the existence of the jurisdiction to grant relief, if forfeiture of proprietary or possessory rights, as opposed to merely contractual rights, is in question. I hold, therefore, that the court has jurisdiction to grant Burndy relief.

The judge was of the view that, even if there was jurisdiction, relief should not be granted. He considered it inappropriate to grant relief, primarily, as I read his judgment, because Mr. Reiter had not been told of clause 10(iii) and had not been given any instructions relating to it. The judge said that he was not satisfied that he had been told the whole story in that regard; for my part, however, I have great difficulty in seeing what else he could have expected to be told. I do not find anything sinister in the failure to give Mr. Reiter proper instructions. The management of Burndy acted very incompetently, but I cannot see that incompetence is necessarily a bar to the grant of relief against forfeiture.

In my judgment, it is necessary to consider all the circumstances, including what was happening on B.I.C.C.'s side. I remind myself that there is not, and has never been, any plea against B.I.C.C. of waiver or equitable estoppel, on the basis of Hughes v. Metropolitan Railway Co. (1877) 2 App.Cas. 439, in respect of B.I.C.C.'s exercise of its right under clause 10(iii). The facts remain, however, that B.I.C.C., having initially sent in ordinary commercial invoices for the half-share of the costs and fees, and having plainly not insisted on the 30 days time limit when the invoices were rendered, invoked clause 10(iii) out of the blue on 18 October 1982, when there had been no relevant correspondence between the parties for two months, and at a time when a meeting had been set up between Mr. Reiter and Mr. Ross-Gower to resolve outstanding billing questions, and at a time when B.I.C.C. in truth owed Burndy more under the commercial agreement than Burndy owed B.I.C.C. under the assignment. In my judgment, the case for relief is made out and, if I had not taken the view that Burndy had a good defence to the action on the ground of set off, I would grant Burndy relief, by way of an extension of time, against forfeiture of its rights under clause 10(iii).

The licence to Burndy-Electra

Since, for the foregoing reasons, Burndy is, in my judgment, entitled to succeed on this appeal, the question whether any assignment of rights which Burndy may be ordered to make under clause 10(iii) should be expressed to be subject to some licence in favour of Burndy-Electra does not arise. It is, therefore, unnecessary for me to express any

concluded opinion on that question. I would merely say that as at present advised, I have considerable difficulty in accepting the judge's views as to the application and effect of section 33 of the Patents Act 1977 but, conversely, I am attracted by Mr. Thorley's submissions that any licence previously subsisting in favour of Burndy-Electra was brought to an end by the principal agreement and that it is not open to Burndy to set up any such previous licence against B.I.C.C. now as Burndy agreed by clause 2.3 of the principal agreement to procure that its subsidiaries should waive all rights under certain previously existing agreements including the existing agreement through which Burndy-Electra claims title.

I would allow this appeal.

KERR L.J. I have had the advantage of reading the judgment of Dillon L.J. and agree that this appeal should be allowed for the reasons stated by him under the heading "Relief against forfeiture." The way in which Burndy's case was pleaded in their defence did not enable them to rely on the principles laid down in authorities such as Hughes v. Directors of the Metropolitan Railway Co., 2 App.Cas. 439 and Charles Rickards Ltd. v. Oppenhaim [1950] 1 K.B. 616, although they might well have been raised on the facts. But the pleading is sufficient to raise a defence for the intervention of equity as an answer to B.I.C.C.'s claim and entitles the court to have regard to all the circumstances in that connection. In my view, this defence is made out.

B.I.C.C.'s primary claim is for an order for specific performance of clause 10(iii) of the assignment by requiring Burndy to transfer all rights and benefits in the patents and applications listed in the schedule. B.I.C.C. are therefore themselves claiming an equitable remedy. However, having regard to the course of dealing between the parties and the events to which Dillon L.J. has already referred, I do not think that B.I.C.C. are entitled to invoke the assistance of equity. I do not find it necessary to lengthen this judgment by a full analysis of the various invoices which they sent and the communications between the parties about them, save to say that this clearly shows that B.I.C.C.'s conduct throughout was wholly inconsistent with the applicability of clause 10(iii) which they then suddenly sought to impose without any warning. In addition, there is the question of set off to which I refer later. I would accordingly refuse an order for specific performance in the circumstances of this case, with the result that on this basis B.I.C.C. would, in any event, only succeed to the extent of any remedy by way of damages which they may be able to establish.

However, for the reasons stated by Dillon L.J., I also agree that this is a case where the court's equitable jurisdiction goes further. It entitles the court to grant an extension of time to Burndy to comply with clause 10(iii) in order to relieve them from the forfeiture of their proprietary share in the "joint rights." The relevant authorities have been discussed by Dillon L.J. and I agree with his conclusions about their effect on the court's jurisdiction where, as here, the failure to make a timeous payment results in the forfeiture of property and not merely in the loss of contractual rights. I also agree that this is a case in which this court

should differ from the views expressed by Falconer J. as to how he would have exercised his discretion if he had concluded that this fell to be done. The judge does not mention, and does not appear to have had in mind, any of the important circumstances which clearly call for the intervention of equity in all the circumstances of this case. The only considerations mentioned by him in this connection are (1) the fact that the value of the patents etc. was many times greater than the payment due from Burndy under clause 10(iii), and (2) the fact that Mr. Reiter was unaware of the terms of clause 10(iii) and that no explanation had been given for this, a point with which Dillon L.J. has already dealt. He makes no mention of the course of dealing between the parties, the conduct of B.I.C.C. in suddenly invoking clause 10(iii) without warning against this background, and the fact that, when B.I.C.C. invoked this provision, there were outstanding invoices from Burndy to B.I.C.C. which were due and payable and which greatly exceeded the amounts due from Burndy under clause 10(iii).

The latter point must weigh heavily in Burndy's favour in the exercise of the court's equitable jurisdiction, particularly where the basis of this jurisdiction is capable of including the grant of relief against forfeiture. It would obviously be inequitable to allow a plaintiff to insist upon the forfeiture of a defendant's valuable right of property for non-payment of a relatively small sum when the plaintiff is at that time himself indebted to the defendant in a far larger sum. However, with the greatest respect for the views of Dillon L.J. stated in his judgment under the heading "Set Off," I cannot agree that the existence of a right of set off in itself provides a defence to B.I.C.C.'s claim for specific performance under clause 10(iii), and that B.I.C.C.'s action therefore fails in limine on this ground. This does not affect the outcome of the present appeal, but it raises a point of some general importance.

I bear in mind the passage from the speech of Lord Diplock in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717, which Dillon L.J. has already quoted. The context in that case was the entitlement of a debtor to rely upon a right of set off arising in connection with a contract under which the creditor was claiming payment from the debtor. The latter was held to be entitled to rely upon an unliquidated cross-claim which arose under the same contract. This entitlement had not been excluded by the terms of the contract, with the result that the amount of the creditor's claim fell to be abated by the amount by which the debtor was held entitled to a set off against it. To that extent he could withhold payment in response to the creditor's demand. The creditor's claim was for the payment of money and he had no other contractual right; the sole issue was what could be set off against a monetary claim.

The position under clause 10(iii) is in my view very different, although I respectfully agree with the judgment of Dillon L.J. under the heading: "The construction and effect of clause 10 of the assignment." Upon receiving a valid written request for payment of half the sums expended by B.I.C.C. in processing and maintaining the parties' "joint rights," Burndy were obliged to pay this amount or risk the forfeiture of their half share in these rights. Following the decision in the Gilbert-Ash

case [1974] A.C. 689, Burndy would therefore have been entitled to respond to such a request by claiming to set off an equal amount of the debts owed to them by B.I.C.C. so as to extinguish B.I.C.C.'s claim for payment. If they had done so, they would not have been in default under this provision and B.I.C.C. would have had no basis for contending that a right of forfeiture of Burndy's share in the "joint rights" had arisen. Further, following Stooke v. Taylor, 5 Q.B.D. 569 - and, a fortiori, Gilbert-Ash - proceedings by B.I.C.C. to recover the sums due from Burndy would have failed upon a plea of set off by Burndy, as Mr. Gratwick rightly conceded.

However, I cannot accept that, on the proper construction of the assignment as a whole and of clause 10(iii) in particular, Burndy were simply entitled to do nothing in response to a valid claim for payment by B.I.C.C. and then to rely on the overall state of accounts between the parties, not arising under the terms of the assignment, as an answer to B.I.C.C.'s claim to invoke the next provision of this clause by requiring Burndy to transfer their share of the "joint rights." Such a conclusion does not follow from the decision in the Gilbert-Ash case or of any other authority of which I am aware. It would imply that B.I.C.C. were not entitled to make a valid request for payment by Burndy under clause 10(iii) of the assignment at any time when B.I.C.C. owed an equal or greater amount to Burndy by reason of transactions which had nothing to do with the assignment, as is the position in the present case. Although Burndy were overall creditors of B.I.C.C., the dictum of Cockburn C.J. in Stooke v. Taylor, 5 Q.B.D. 569, 576, to which Dillon L.J. has referred, cannot, in my view, be applied to clause 10(iii) of the assignment: B.I.C.C. were nevertheless entitled to invoice Burndy under this provision without at that stage having to give credit for Burndy's invoices under other contracts. The dictum would only operate if and when B.I.C.C. thereafter sought to enforce payment by action. In my view, any other construction of provisions such as clause 10(iii) would fly in the face of commercial sense and would be wrong. They might require an ex post facto determination of the overall consolidated state of accounts on a particular earlier date, which no one was then in a position to oversee, as between different branches or departments of the contestant legal entities engaged in different commercial transactions.

Similarly, the remarks of Lord Denning M.R. in Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, 974B-E, which Dillon L.J. has also quoted, do not, in my view, detract from this conclusion in any way when they are considered in their context. The charterparty required the charterer to pay the monthly hire "in cash in Montreal." The full text of the particular clause in that case does not appear from the report (see [1978] Q.B. 927, 966E), but it may well have specified a particular bank in Montreal where the hire was to be paid into the shipowners' account, as is frequently done. The issue was solely the extent to which the charterers could validly abate the amount of any such monthly payment by deductions which were sufficiently connected with the off-hire clause to permit them to do so. To the extent that such deductions could be claimed as an equitable set off against the owners' right to the hire they were held to be permissible. In

so far as they went beyond this, no deduction could be made and the shipowners were entitled to exercise their right of withdrawal under the hire clause: see [1978] Q.B. 927, per Lord Denning M.R. at pp. 974H to 977D and per Goff L.J. at pp. 981E to 989A. It would be out of the question, in my view, for charterers to pay nothing, or less than the hire with the permissible deductions, and then to seek to rely on the owners' indebtedness to them on general account unconnected with the charterparty; at any rate without first having claimed a right of set off.

This is the context in which Lord Denning M.R.'s remarks fall to be placed, and I return to his judgment again in a moment. If the shipowners had owed moneys to the charterers on grounds which were unconnected with the off-hire clause, let alone unconnected with the charterparty, I think that the decision would clearly have gone the other way. Lord Denning M.R.'s remarks do not support the contention that the charterers would have been entitled to rely on any sum owed to them by the owners which could not have been validly deducted under the off-hire clause. On the contrary, the reasoning of the judgment in the passages mentioned above clearly shows that it was only to this extent that the charterers could invoke a right of set off. Similarly, in British Anzani (Felixstowe) Ltd. v. International Marine Management (U.K.) Ltd. [1980] Q.B. 137, the claimed set off arose out of the agreement and underleases on which the plaintiffs' claim was based and not out of some unconnected transaction.

Burndy's right to rely on a set off against B.I.C.C.'s invoices under clause 10(iii) of the assignment by reason of the overall accountability between them under other unconnected contracts can, in my view, only arise in two ways. First, if B.I.C.C. had sought to enforce payment of their invoices by action, Burndy would have had a right at law to set off the debts owed by B.I.C.C. under other invoices so as to extinguish B.I.C.C.'s claim and defeat the action. The position would be the same if B.I.C.C.'s liability had not arisen under mutual debts which gave right to a legal set off but under any right recognised as giving rise to an equitable set off: see e.g. Hanak v. Green [1958] 2 Q.B. 9 and Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689. Secondly, if B.I.C.C. seek to enforce clause 10(iii) by demanding the transfer by Burndy of their share in the "joint rights," as they do, then Burndy can invoke the protection of the court's discretionary jurisdiction in equity. For that purpose, the existence of a right of set off may carry great weight, but the intervention of equity must then depend on all the circumstances. In the present case, the protection of equity can be invoked in two respects: to refuse an order of specific performance in favour of B.I.C.C. and to grant Burndy relief from the forfeiture of their proprietary "joint rights." But the right to a set off, whether legal or equitable, does not, in my view, in itself operate as a bar to B.I.C.C.'s claim for specific performance, as it would in relation to a monetary claim; its only relevance is that equity may intervene on a discretionary basis. In my view, this conclusion stems from the true

construction and effect of clause 10(iii) within the frame of the assignment as a contract which is unlinked to any other transaction out of which B.I.C.C.'s overall indebtedness arises, and it is also consistent with legal principle.

There is little authority on the point of principle, but we were helpfully referred by Mr. Cullen to the discussion in Spry, Equitable Remedies, 2nd ed. (1980), pp. 168 et seq. I would merely refer to two passages. First, at p. 169 the author states that "where a right to a set off exists at law its existence will be recognised in equitable proceedings, unless circumstances arise as to render reliance on it unjust." Then he says, at p. 171:

"It should be noted that it has sometimes been said that equitable set offs cannot arise in cases of specific performance [quoting Halsbury's Laws of England, 3rd ed. (1960), vol. 34, p. 400, now 4th ed. (1983), vol. 42, para. 440], but there is no reason in principle why this proposition should be correct, and, indeed, cases relied upon in support of it [quoting Phipps v. Child, 3 Drew. 709, cited in Halsbury, ibid.] are found to depend in truth on the absence of a sufficient general equity to relief."

This must apply equally to legal rights of set off pleaded as a defence to a claim grounded in equity, such as a claim for specific performance.

Spry also refers to Rawson v. Samuel, Cr. & Ph. 161 in support of this passage. In that case the issue was whether an injunction should be granted to the plaintiffs in the Court of Chancery to restrain the defendants from enforcing a judgment for damages for breach of contract pending the decision on the plaintiffs' claim for an account in the Court of Chancery. In rejecting this, Lord Cottenham L.C. said, at pp. 178-180:

"We speak familiarly of equitable set off, as distinguished from the set off at law; but it will be found that this equitable set off exists in cases where the parties seeking the benefit of it can show some equitable ground for being protected against his adversary's demand. The mere existence of cross-demands is not sufficient;... Is there, then, any equity in preventing a party who has recovered damages at law from receiving them, because he may be found to be indebted, upon the balance of an unsettled account, to the party against whom the damages have been recovered?... What equity have the plaintiffs in the suit for an account to be protected against the damages awarded against them? If they have no such equity, there can be no good ground for the injunction. Several cases were cited in support of the injunction; but in every one of them ... it will be found that the equity of the bill impeached the title to the legal demand.... None of these cases furnish any grounds for the injunction in the case before me."

Similarly, I think - in agreement with the passage quoted from Spry - that the application of equitable principles is the explanation of the

decision in Phipps v. Child, 3 Drew. 709, although in that case the plaintiff was successful in his equitable claim. This was for specific performance of an agreement for the sale of part of a colliery which the defendant resisted inter alia on the ground that sums were due to him under a separate contract which he claimed to be entitled to set off against the purchase price. Sir Richard Kindersley V.-C. rejected this, saying, at p. 714:

"Then the question is, whether there is anything in the extrinsic circumstances to justify me in refusing to decree specific performance, and I think there is none.... Next it is said, that if an account were taken, it would appear that something would be due from the plaintiff to the defendant, which ought to be set off against the demand on the defendant. I think that is not a ground for me to refuse specific performance.... There may be a right in the defendant to bring an action against the plaintiff. But, if there is such a right, that is not a reason for non-performance of the contract."

My reason for citing these passages is because they support the conclusion that a claim for an equitable remedy, such as the claim for specific performance in this case, can only be resisted on equitable grounds. To adapt the well known phrase of Lord Cottenham L.C., the defence must impeach the title to the plaintiff's demand. If it does not do so, then it depends upon the application of the rules of equity whether the plaintiff's equitable claim will be enforced or not. But the existence of a right of set off, whether legal or equitable, does not per se provide a defence to the equitable claim for specific performance so as to defeat it in limine. Its effect upon the outcome of the action will depend upon the circumstances and the application of the principles of equity. In my view this is clearly implicit in the judgment of Lord Denning M.R. in Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, in the passage immediately following that quoted by Dillon L.J., at p. 974:

"In making the distinction between set off and cross-claim, the courts of common law had their own special rules. For instance in a series of cases they formulated rules saying when there could be an abatement of rent or an abatement of the sums due for work and labour done, or an abatement of the price of goods sold and delivered. So that the defendant could make deductions accordingly. But the courts of equity, as was their wont, came in to mitigate the technicalities of the common law. They allowed deductions - by way of equitable set off - whenever there were good equitable grounds for directly impeaching the demand which the creditor was seeking to enforce: see Rawson v. Samuel (1841) Cr. & Ph. 161, 178-179, per Lord Cottenham L.C. These grounds were never precisely formulated before the Judicature Act 1873. It is now far too late to search through the old books and dig them out. Over 100 years

have passed since the Judicature Act 1873. During that time the streams of common law and equity have flown together and combined so as to be indistinguishable the one from the other. We have no longer to ask ourselves: what would the courts of common law or the courts of equity have done before the Judicature Act? We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties? See United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C. 904 per Lord Diplock. This question must be asked in each case as it arises for decision: and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is quite clear: it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim."

Similarly, Goff L.J. said, at p. 981:

"The circumstances must be such as to make it unfair for the creditor to be paid his claim without allowing that of the debtor if and so far as well founded and thus to raise an equity against the creditor or, as it has been expressed, impeach his title to be paid."

I appreciate that, in that case, no question of discretion arose. The shipowners had already withdrawn the ships and were not claiming any equitable remedy. There was equally no question of a claim for relief from forfeiture, and any such claim would have been misconceived: see Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 A.C. 694. The court was concerned solely with the extent to which an equitable set off could be relied upon by way of deduction from monthly hire payable under a time charter. My main reason for citing these passages is to show that Lord Cottenham L.C.'s analysis is still applicable: leaving aside the third category of set off mentioned in Hanak v. Green [1958] 2 Q.B. 9, 23 (matters of equity which formerly might have called for injunction or prohibition, which does not arise here), the test is whether the defence of set off impeaches the plaintiff's demand. In the present case Burndy's right to a legal set off would provide a complete defence if they were sued for the amounts due under clause 10(iii), because these would impeach and extinguish B.I.C.C.'s claim. But the existence of this right of set off does not impeach B.I.C.C.'s claim for specific performance. It only raises an equity in favour of Burndy which, together with all the other circumstances to which I have already referred, calls for the exercise of the court's discretionary equitable jurisdiction (a) to refuse an order of specific performance in favour of B.I.C.C. and (b) to grant Burndy relief from the forfeiture of their share of the "joint rights" by extending their time for complying with clause 10(iii). I would accordingly allow this appeal on these grounds.

ACKNER L.J. I have had the benefit of reading both the judgments of Kerr L.J. and Dillon L.J. I also agree that the appeal be allowed, and for the reasons set out in the judgment of Dillon L.J. in so far as they differ from those of Kerr L.J.

Solicitors: Allison & Humphreys; Bird & Bird.

[Reported by PAUL MAGRATH, ESQ., Barrister-at-LaW]

8 November. The Appeal Committee of the House of Lords (Lord Keith of Kinkel, Lord Roskill and Lord Brandon of Oakbrook) allowed a petition by the plaintiffs for leave to appeal.