Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH: HL 1977

English and German companies traded in partnership. They agreed that all disputes between them should be arbitrated in Germany. The English company sold machinery to the German company and by way of payment received some 24 bills of exchange. After the first six bills of exchange had been paid, the German company refused further payment on the ground that the English company had mismanaged the affairs of the partnership and that the machinery which it supplied was defective. The English company then began in England an action on the bills. The German company sought to stay the action under the provisions of the Arbitration Act.
Bristow J at first instance refused the stay but his decision was reversed by the Court of Appeal.
Held: The appeal succeeded. The arbitration agreement did not extend to disputes on bills of exchange upon which, in any event, their Lordships pointed out, there was no dispute.
Lord Wilberforce said: ‘I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange . . As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated . . The amount claimed here in respect of the machines is certainly neither ascertained nor liquidated, and the claim in respect of the mismanagement is one for a wholly unrelated tort, so that there would seem to be no basis for denying the appellant’s claim that, as regards the bills, there is no dispute.’
Lord Salmon (dissenting but on a different point) said: ‘I agree that there is no defence to the bills, since the only possible defence (which is not relied upon by the respondents) could be that their acceptance had been procured by fraud, duress or for a consideration which had failed and because the damages claimed in the arbitration are unliquidated damages and such damages cannot be set off against a claim on the bills of exchange.’
Lord Russell of Killowen said: ‘It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as a set-off or counterclaim. This is a deep rooted concept of English commercial law. A vendor and purchaser who agree upon payment by acceptance of bills of exchange do so not simply upon the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale. The bill is itself a contract separate from the contract of sale. It’s purpose is not merely to serve as a negotiable instrument; it is also to avoid postponement of the purchaser’s liability to the vendor himself, a postponement grounded upon some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration.’


Lord Wilberforce, Lord Dilhorne, Lord Salmon, Lord Russell of Killowen


[1977] 2 All ER 463, [1977] 1 WLR 713


England and Wales

Banking, Contract

Updated: 06 May 2022; Ref: scu.459795