COUNSEL: Michael Beloff Q.C. and Timothy Wormington for the defendants.

Kenneth Rokison Q.C. and Michael Pooles for the plaintiff.

 

SOLICITORS: Bower Cotton s Bower; McKenna s Co.

 

JUDGES: Neill, Morritt and Hutchison L.JJ.

 

DATES: 1996 April 17, 18; 25

 

 

APPEAL from Waller J.

 

[*46] 25 April. The following judgments were handed down.

 

NEILL L.J. The plaintiff in these proceedings is Coca-Cola Financial Corporation (“C.C.F.C.”). By an agreement in writing dated 19 October 1987 (“the loan agreement”) C.C.F.C. agreed to lend to the first defendant, Finsat International Ltd. (“Finsat”) (then known as Satra International Ltd.), a sum not exceeding U.S.$5m. The loan agreement made provision for the payment of interest and also provided that the determination date for the loan was to be 15 August 1992. It was a condition precedent to the effectiveness of the loan agreement that a guarantee had been executed by the date of the loan agreement by guarantors. On 15 October 1987, in accordance with the condition precedent in the loan agreement, a guarantee was executed by the second to eighth defendants in these proceedings and by Finsat. By the guarantee Finsat and the guarantors agreed to make payment forthwith of all sums due under the loan agreement on written demand being made by C.C.F.C. It was further provided that the guarantors would be liable as primary obligors and not merely as sureties.

 

We were referred to the following specific provisions in the loan agreement:

 

“1.4 This agreement is, and the notes when delivered hereunder will be, legal, valid and binding obligations of the debtor enforceable against the debtor in accordance with their respective terms, subject to laws affecting creditors’ rights generally and the availability of equitable remedies. . . . 5.1 The lender shall have the right to require, as a condition precedent to any advance, that the debtor shall deliver to the lender, one or more promissory notes for the amount of each advance and for interest. . . . 5.7 All payments under this agreement, including all payments of the notes and all prepayments, shall be made in United States dollars, in immediately available funds, free and clear of any right of set-off or counterclaim or any withholding or deduction whatsoever, provided that if the debtor is required by law to make any withholding or deduction, it shall pay such additional sum to the lender as will ensure that after such deduction or withholding the lender receives the full amount due to it under this agreement. If the lender shall be or become entitled to any tax credit or relief in respect of any tax which the debtor is required to withhold or deduct, the lender shall promptly account to the debtor therefor.”

 

It is to be noted that, by paragraph 14 of the guarantee, it was provided that article 5.7 of the loan agreement should apply to the guarantee. Both the loan agreement and the guarantee were expressed to be governed by and construed in accordance with English law.

 

On or about 21 October 1987, C.C.F.C. advanced the sum of $5m. to Finsat pursuant to the loan agreement. On 28 January 1994 written demand was made for the repayment of the loan of $5. and interest thereon. On the same day written demands were sent to the other defendants for payment of the same sums due under the guarantee. However, none of the defendants made any payment of the sums demanded or any part thereof and on 26 April 1994 C.C.F.C. issued the writ. On 29 June 1994 C.C.F.C. issued a summons under R.S.C., Ord. 14. [*47] The summons was heard by Waller J. on 21 October 1994 when he gave judgment for C.C.F.C. against each of the defendants in the sum of $5m. together with the sum of $996,234á49 by way of interest thereon. The judge refused leave to appeal but leave was subsequently given in March 1995 by a single Lord Justice.

 

C.C.F.C. contends that its claim is a simple claim under the loan agreement and the guarantee and that there is no defence. The defendants, however, argue that they should have unconditional leave to defend or at least that there should be a stay of execution of any judgment. They put forward the following contentions: (1) that the loan agreement and the guarantee cannot be seen in isolation. They formed part of a number of complex transactions between the Coca-Cola Co., the parent company of C.C.F.C., and Finsat and other Satra companies whereby Finsat and the Satra companies provided assistance to the Coca-Cola Co. in its efforts to obtain access to markets in the former Soviet Union; (2) that the case raises issues of fact and some questions of law which are unsuitable for determination on a summons under Order 14; (3) that Finsat has counterclaims against the Coca-Cola Co. which can be used by way of set-off against C.C.F.C.’s claim under the loan agreement and the guarantee. These counterclaims substantially exceed the claim by C.C.F.C.; (4) that article 5.7 in the loan agreement cannot be relied upon by C.C.F.C. because (a) on its true construction article 5.7 does not apply to the counterclaims made by Finsat; (b) that even if as a matter of construction article 5.7 could apply to these counterclaims it is unenforceable as being contrary to public policy; (5) that in any event any judgment in favour of C.C.F.C. should be stayed pending the determination on Finsat’s counterclaims which form the subject matter of proceedings in the Supreme Court of the State of New York.

 

I propose to consider these arguments in turn.

 

Whether proceedings under Order 14 are justified

 

Mr. Beloff reminded us of the guidance given by Parker L.J. in Home and Overseas Insurance Co. Ltd. v. Mentor Insurance Co. (U.K.) Ltd. [1990] 1 W.L.R. 153 as to the circumstances in which the summary judgment procedure could be used. Parker L.J. said, at p. 158:

 

“The purpose of Order 14 is to enable a plaintiff to obtain a quick judgment where there is plainly no defence to the claim. If the defendant’s only suggested defence is a point of law and the court can see at once that the point is misconceived the plaintiff is entitled to judgment. If at first sight the point appears to be arguable but with a relatively short argument can be shown to be plainly unsustainable the plaintiff is also entitled to judgment. But Order 14 proceedings should not in my view be allowed to become a means for obtaining, in effect, an immediate trial of an action, which will be the case if the court lends itself to determining on Order 14 applications points of law which may take hours or even days and the citation of many authorities before the court is in a position to arrive at a final decision.”

 

It is important to keep this guidance well in mind. At the same time one must take account of the fact that in some cases it may take a little [*48] while before the court can make an accurate assessment of the difficulty of any points of law which require to be resolved and whether further argument on another occasion is necessary. Moreover, sometimes, as in the present case, the quality of the advocacy is such that the court can be confident at the end of the hearing that all relevant arguments have been fully deployed and that any postponement of a decision would be unjustified. Issues of fact of course give rise to a different problem because it is seldom possible to decide disputed questions of fact on affidavits alone unless there are contemporary documents which provide sufficient answers. But here again there will be cases where the court can proceed to a decision on the hypothesis that the defendant will be able to establish the matters asserted in his affidavits or defence.

 

I turn therefore to the issues raised by the defendants other than the specific matters raised by way of counterclaim and the issues arising from article 5.7. It was argued on behalf of the defendants that, even apart from the matters relied on by way of counterclaim which could be used by way of set-off, leave to defend should be given for the following reasons: (1) that in the course of the discussions which had led to the written agreement in December 1986 between Coca-Cola and the second, seventh and eighth defendants Mr. Winer on behalf of Coca-Cola had represented that the loan of $5m. and interest thereon would be repayable by Finsat only out of its profits made from the commercial arrangements between Coca-Cola and the Satra companies. This representation is referred to in paragraph 9(i) of the revised draft points of defence; (2) that having regard to the overall character of the agreement between Coca-Cola and the Satra companies it was to be implied that the loan was to be repaid out of such profits. The agreement was the oral agreement made in October 1985 referred to in paragraph 7(1) of the revised draft points of defence; (3) that it was a condition precedent to any obligation on Finsat to repay the loan and interest that Coca-Cola would perform its obligations under the agreement; (4) that Coca-Cola had repudiated the agreement and had been guilty of such wholesale non-performance of it and such breaches that the defendants were discharged from any obligation to perform the loan agreement. It was said that the defendants accepted the repudiation by refusing to make any payment under the loan agreement. This alleged repudiation and breach were referred to in paragraph 21(3) of the revised draft points of defence.

 

It seems to me to be quite clear from an analysis of these suggested grounds of defence that they could only be relied upon if one or both of the following propositions were established: (a) that it was an implied term of the loan agreement and the guarantee that the loan and interest would be repayable only out of profits made from the commercial arrangements made between Coca-Cola and the Satra companies; or (b) that the obligation of the defendants to make repayments under the loan and the guarantee were discharged by the repudiatory breach by Coca-Cola of the oral agreement of October 1985.

 

I deal first with the implied term. The circumstances in which a term is to be implied in a contract are well established. A term will be implied only when it is necessary to give business efficacy to a contract or where it is obvious from the factual matrix surrounding the contract that such a [*49] term was implicit. Furthermore an implied term must be clear. In the present case I can see no basis for implying the suggested term in the loan agreement and the guarantee. The arrangements between the parties were to last five years and the loan was expressed to be repayable at the end of that time. The proposed term was neither necessary nor obvious. Nor would it have been clear. There is no explanation in the loan agreement or elsewhere as to how the “profits” were to be calculated.

 

I turn to the question of repudiation. There is, however, no sufficient link between the loan agreement and the guarantee on the one hand and the earlier oral agreement on the other hand. It was suggested at the conclusion of the argument that the loan made by C.C.F.C. was made as the agent of Coca-Cola. But no such agency is pleaded in the revised amended points of defence and such a plea would be inconsistent with paragraph 13(1) of the pleading in which it was contended that Coca-Cola “procured” Finsat to enter into the loan agreement.

 

I am satisfied that none of the matters put forward raises an arguable defence to the claim by C.C.F.C. I turn therefore to the counterclaims.

 

The counterclaims

 

The counterclaims are conveniently summarised in the defendants’ written submissions as follows: (a) it is said that Coca-Cola undertook to provide financial assistance to facilitate and secure an increase in sales of Lada cars into the United Kingdom; that that assistance was fixed by an agreement in 1990 at $200 per car; that this assistance has never been paid; and that the sum outstanding from Coca-Cola exceeds $8á5m. plus interest; (b) it is said that by the terms of the written agreement in December 1986 (described as the principal agreement) Coca-Cola were to pay a commission of 10 per cent. of the amount of the counter trade credits arising in favour of Coca-Cola; that the Satra companies achieved credits totalling some $40m.; that there is now an unpaid balance of commission amounting to over $2á5m.; (c) it is said that one of the principal advantages which the Satra companies were to derive from the counter trade arrangements was a licence to set up 10 bottling plants for Coca-Cola soft drinks in the former Soviet Union; that Coca-Cola has reneged on this licence agreement; and that as a result the Satra companies have suffered a substantial, though at present unquantified, loss.

 

I shall assume for the purpose of this judgment that some at any rate of these claims could be made against Coca-Cola, though on the documents which we have seen so far it is difficult to detect a contract to grant a licence to set up bottling plants in the former Soviet Union. It does not seem to me, however, that any of these claims against Coca-Cola could be used by way of set-off in the present proceedings by C.C.F.C. C.C.F.C. is a distinct legal entity.

 

It follows therefore, in the light of the conclusions which I have reached so far, that I cannot see any basis on which leave to defend could be given. Nevertheless I propose to deal with the arguments based on article 5.7. I must also deal with the submission that there should be a stay of execution. [*50]

 

Article 5.7

 

It will be convenient to repeat the opening words of article 5.7:

 

“All payments under this agreement, including all payments of the notes and all prepayments, shall be made in United States dollars, in immediately available funds, free and clear of any right of set-off or counterclaim or any withholding or deduction whatsoever . . .”

 

It is argued on behalf of C.C.F.C. that even if Finsat had an arguable counterclaim which in other circumstances might have been used by way of set-off, article 5.7 precludes its use in the present proceedings. Finsat challenge this argument on two grounds: (a) that on its true construction article 5.7 does not apply to the counterclaims made by it; and (b) that even if as a matter of construction article 5.7 could apply to these counterclaims the article is unenforceable as being contrary to public policy.

 

In support of the first of these grounds it was argued that article 5.7 deals only with the mechanics for making a payment under the agreement. It is concerned, it was said, with the manner of payment and the currency of payment. Thus the funds to be used in making payments cannot be encumbered by rights of set-off exercisable, for example, by third parties. It was therefore argued that article 5.7 does not define the extent of the obligation to make payment but merely presupposes it. In this context our attention was drawn to article 1.4, which I have already set out, which in terms provides that the obligations of Finsat are enforceable “subject to laws affecting creditors’ rights generally and the availability of equitable remedies.”

 

I am quite unable to accept these arguments. The language of article 5.7 is clear. Article 5.7 provides that payments are to be made free and clear of “any right of set-off or counterclaim.” In my judgment these words define the extent of the obligation to pay. The point is underlined by the following words “[free and clear of] any withholding or deduction whatsoever.”

 

I turn therefore to the main argument which was advanced in support of the appeal. This argument was to the effect that a party to court proceedings was not free to waive or contract out of the right given to him by law to set off one debt or claim against another. The argument was developed as follows.

 

(1) At common law no cross-claim could be set off in any proceedings. The position changed, however, following the enactment of the Insolvent Debtors Relief Act 1729 (2 Geo. 2, c. 22) and the Debtors Relief (Amendment) Act 1735 (8 Geo. 2, c. 24). By these Acts it became possible for mutual debts between the plaintiff and the defendant to be set off one against the other.

 

(2) It may be that these statutes were enacted partly to provide protection against imprisonment for debt but, as Parke B. explained in Forster v. Wilson (1843) 12 M. s W. 191, 203, the purpose of the right of set-off between solvent parties, as opposed to the right of set-off in bankruptcy, was to prevent cross-actions.

 

(3) Since 1873 the common law and equity have been administered concurrently. Accordingly in any division of the High Court a defendant can rely on the rules governing equitable set-off. The modern rules relating [*51] to set-off are those set out in the judgment of Morris L.J. in Hanak v. Green [1958] 2 Q.B. 9.

 

(4) The policy of preventing cross actions at law has been carried further by statute. By section 49(2) of the Supreme Court Act 1981 it is provided:

 

“Every court shall give the same effect as hitherto - (a) to all equitable estates, titles, rights, reliefs, defences and counterclaims, and to equitable duties and liabilities; and (b) . . . and, subject to the provisions of this or any other Act, shall so exercise its jurisdiction in every cause or matter before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.”

 

This provision for the final determination of disputes reproduced in substance section 43 of the Supreme Court of Judicature (Consolidation) Act 1925, which itself reproduced similar provisions in the Supreme Court of Judicature Act 1873 (36 s 37 Vict. c. 66).

 

(5) The principle that a defendant could not waive his right of set-off was supported by authority. In Lechmere v. Hawkins (1798) 2 Esp. 626 it was held by Lord Kenyon that a debtor could not be prevented from setting off a debt due to himself even though he had expressly promised to repay the sum lent to him. The same principle was reinforced by the decision of Lord Erskine L.C. in Taylor v. Okey (1806) 13 Ves. 180. It was also to be noted that the principle was clearly stated in Halsbury’s Laws of England, 4th ed., vol. 42 (1983), p. 252, para. 434: “The right of set-off cannot be waived.”

 

(6) The authorities which suggested that the parties were free to make any bargain they chose were decided in the absence of any citation of the old cases.

 

The judge rejected the argument that article 5.7 was unenforceable. In doing so he followed the decision of Hirst J. in Hongkong and Shanghai Banking Corporation v. Kloeckner s Co. A.G. [1990] 2 Q.B. 514. In that case the bank brought an action for the trading balance due from the defendants of about $8m. The bank applied for judgment under Order 14. The defendants sought to set off a counterclaim of about $10m. which, it was said, the bank had failed to pay under a stand-by letter of credit. The defendants had earlier given an undertaking to pay the bank in full “without any discount, deduction, offset or counterclaim whatsoever.” The judge held that this undertaking excluded the right of set-off. He referred to the decision of the Court of Appeal in Halesowen Presswork s Assemblies Ltd. v. Westminster Bank Ltd. [1971] 1 Q.B. 1 where it had been held that the right in law of a banker to combine the accounts of a customer and set off debits on or against credits on the others could be excluded by an agreement, express or implied, to keep the accounts separate. Hirst J. regarded the decision in the Halesowen case as making at the very least a major inroad into the suggested principle stated in Halsbury’s Laws of England in the passage which I have cited. Hirst J. continued, at p. 521: [*52]

 

“In my judgment the Halesowen case gives me very ample grounds for departing from [Lechmere v. Hawkins, 2 Esp. 626 and Taylor v. Okey, 13 Ves. 180]. In consequence, I hold that as a matter of law the bank are entitled to rely on the clause excluding any right of set-off against the letter of undertaking, and that this effectively debars the set-off which Kloeckner seek to maintain.”

 

In this court Mr. Beloff sought to distinguish the decision in Halesowen [1971] 1 Q.B. 1 on the basis that the exception to the general principle was limited to banking transactions. He also invited us not to follow the decision of Hirst J. in the Kloeckner case [1990] 2 Q.B. 514.

 

I have come to the clear conclusion that the right of set-off can be excluded by agreement. In general English law permits the parties to a contract to include in it such terms as they consider to be appropriate. This freedom of contract is subject to a measure of control based on grounds of public policy and to some statutory restrictions such as those contained in the Unfair Contract Terms Act 1977. But I am unable to accept that a party is prevented from excluding the right of set-off by section 49(2) of the Supreme Court Act 1981 or by any ground of public policy. There are many circumstances in which the general admonition in section 49(2) cannot be observed. The court itself can order separate trials of different parts of an action where it is convenient to do so: see, for example, R.S.C., Ord. 15, r. 5. Moreover, I can see no reason in principle why parties who are in a general contractual relationship cannot isolate one contract or one aspect of their dealing and provide that their rights in relation thereto are to be treated separately from their other dealings. Furthermore, this conclusion is supported by dicta in at least three cases decided in the House of Lords. I shall refer to some of the relevant passages.

 

(a) In Halesowen Presswork s Assemblies Ltd. v. Westminster Bank Ltd. [1972] A.C. 785 the appeal was concerned with the mandatory provisions for the taking of an account and for set-off enshrined in section 31 of the Bankruptcy Act 1914 (see now section 323 of the Insolvency Act 1986). But it seems to me to be clear that Viscount Dilhorne, at p. 804, and Lord Simon of Glaisdale, at p. 808, regarded the statutory obligation to set off mutual debts as an exception to the general principle that someone may renounce the benefit of a stipulation or other right introduced entirely in his favour. It is to be noted that even under the early statutes in 1729 (the Insolvent Debtors Relief Act) and 1735 (the Debtors Relief (Amendment) Act) there was no obligation for a solvent debtor to exercise his right of set-off.

 

(b) In Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689 the appeal was concerned with the right under a building contract to claim a set-off in respect of unliquidated cross claims against sums certified to be due under an architect’s certificate. It is true that no reference was made to the cases at the end of the 18th century cited in Halsbury’s Laws, but I can find no suggestion in any of the speeches that parties are not free to exclude the right of set-off by an appropriate term in the contract. Indeed all the indications are to the contrary and Lord Salmon said, at p. 723: [*53]

 

“There is nothing to prevent [the parties to building contracts or subcontracts] from extinguishing, curtailing or enlarging the ordinary rights of set-off, provided they do so expressly or by clear implication.”

 

It was suggested by Mr. Beloff that it was possible that special rules existed in the case of banking transactions and building contracts. With respect, however, I can see no good ground for such a limitation and it is to be noted that in Gilbert-Ash Lord Morris of Borth-y-Gest said, at p. 699, that building contracts were subject to the ordinary rules. He said: “When parties enter into a detailed building contract there are, however, no overriding rules or principles covering their contractual relationship beyond those which generally apply to the construction of contracts.”

 

(c) In Mottram Consultants Ltd. v. Bernard Sunley s Sons Ltd. [1975] 2 Lloyd’s Rep. 197 it was clearly recognised in the speeches of the majority that the right to set off sums against an architect’s certificate could be adjusted by the parties in accordance with their contract. Lord Cross of Chelsea said, at p. 204, that “in an ideal world no difficulties would ever arise since the contract would state unequivocally whether any and if any what kind of deductions are permissible . . .”

 

I would therefore reject the argument that the right of set-off cannot be excluded by agreement. Accordingly, even if I were satisfied that Finsat had some arguable claim against C.C.F.C., I would hold that, in the light of article 5.7, such a claim could not be used by way of set-off.

 

I come finally to the question whether a stay of execution should be granted.

 

The stay of execution

 

Mr. Beloff referred us to R.S.C., Ord. 14, r. 3. Rule 3 is concerned with the circumstances in which on an application for summary judgment, judgment may be given for the plaintiff. But rule 3(2) provides:

 

“The court may by order, and subject to such conditions, if any, as may be just, stay execution of any judgment given against a defendant under this rule until after the trial of any counterclaim made or raised by the defendant in the action.”

 

It was submitted that as the loan agreement and the guarantee formed part of a much larger course of dealing between the Coca-Cola companies and the Satra companies it would be just that there should be a stay of execution until the counterclaims had been tried. It was accepted that the trial of these counterclaims was likely to take place in the Supreme Court of New York. Indeed the application to the judge for a stay was made on the basis that it should be granted until the claims had been determined in the New York proceedings.

 

On the facts of this case I see no reason to interfere with the judge’s decision not to grant a stay. Furthermore, if I were exercising a fresh discretion, I would reach the same decision. There is no arguable set-off or counterclaim against C.C.F.C. In addition C.C.F.C. can rely upon article 5.7. I see no reason why C.C.F.C. should be deprived of the right which article 5.7 was inserted in the loan agreement to secure. [*54]

 

I would dismiss the appeal.

 

MORRITT L.J. I agree.

 

HUTCHISON L.J. I also agree.

 

Appeal dismissed with costs.

 

Leave to appeal refused.

 

25 July. The Appeal Committee of the House of Lords (Lord Browne-Wilkinson, Lord Mustill and Lord Hoffmann) dismissed a petition by the defendant for leave to appeal.