Self-help remedy of ‘set-off’ clarified
GELDOF METAALCONSTRUCTIE v CARVES (CA) [2010]
There has always been some doubt as to the extent to which claims under different contracts can be offset against one another. The Court of Appeal (CA) has sought to clarify the issue and has potentially extended the scope of the self-help remedy of equitable set-off.
facts:
G brought a claim for the price of equipment which C had bought from it under a supply contract. C then sought to set off a counterclaim for damages under a separate installation contract between the two parties involving other equipment albeit related to the same development. The principal issue which the CA had to consider was whether the doctrine of equitable set-off allowed C to do this.
decision:
- Essentially, set-off allows a party to offset its own claim (eg for damages for breach of contract) when faced with a claim (eg for payment of the contract price) from the other contracting party. This right exists in law and in equity but the extent of the right varies:
- the right of set-off at law potentially applies to debts which are unconnected ie the debts in question do not have to arise out of the same or closely connected transactions whereas set-off at equity only applies to debts which are connected;
- legal set-off only concerns claims for liquidated ie certain, ascertained sums whereas equitable set-off can apply where one or both of the claims is a claim for unascertained damages;
- at law, the right only becomes operative at the point of judgment in proceedings being entered and not at an earlier stage. In contrast, equitable set-off is a form of ‘self-help’ remedy which can be invoked without the need to go to court. A debtor can simply deduct the amount of his mutual cross-claim from the debt he owes and tender the balance of the debt (if any) to the creditor. However, the sums in question must be due and payable or, in the case of unliquidated damages, must be a reasonable assessment of the loss made in good faith;
- in addition to the legal and equitable rights, parties can also contractually agree that a payment due by one party can be offset against a payment due from the other party.
- Here, the CA held that G's own conduct (in insisting on the payment of the supply contract invoices as a condition of continuing to work on the installation contract) had brought the two contracts into an “intimate relationship with one another", ie they became ‘connected’, which is one of the conditions for the application of the equitable set-off right.
- C was therefore allowed to set off its counterclaim for damages for repudiation of the installation contract against the payment due to G under the supply contract as it was held to be manifestly unjust to allow G to enforce payment without taking into account the cross-claim for damages under the installation contract. This was so even though the two contracts concerned did not relate to the same items of equipment and the contracts had been entered into about six months apart.
points to note:
- The leading judge reiterated the equitable test as being whether the "cross-claim is ... so closely connected with the claimant’s demand that it would be manifestly unjust to allow it to enforce payment without taking into account the cross-claim". By allowing equitable set-off in a case where separate contracts were concerned, this case appears to have thereby extended the list of situations in which exercise of this right may be allowed.
- Be careful about refusing to perform one contract in order to bring pressure to bear to secure payment on another. This course of action may ultimately weaken your position overall by potentially creating a sufficiently close connection between the two contracts for the doctrine of equitable set-off to apply. However, remember to check whether a right of set-off has been contractually excluded before exercising that right, since otherwise you may find yourself in breach of contract as a result when otherwise you are the innocent party.
- When drafting contracts consider carefully whether the right of set-off should be excluded such as where a seller may wish to ensure that a buyer is prevented from setting off amounts owed to it, or claims regarding alleged defects in the seller's performance, against the sums due to be paid by it to the seller under the agreement.