If parties have monetary debts against each other, a right may arise to “set-off” the debts. One party can look to reduce its liability on one contract, by setting off that liability against debts due under another contract (or the same contract). The right of set-off can act as a defence to part of or the whole claim.
What are the different types of set-off?
While the calculations can be simple, it may be difficult to determine if and when the right of set-off arises. There are different types of set-off but for the purposes of this article, we are only looking at contractual and equitable set-off.
Contractual set-off
The parties can agree on a contractual right of set-off by including a set-off provision in a contract. A set-off clause will usually provide clarity as to what remedies of set-off are available and when they can be applied before a dispute arises. Parties can also agree to exclude set-off rights from a contract.
Equitable set-off
Where a contractual right of set-off doesn’t exist, there may be an equitable right to set-off. Equitable set-off is more difficult to use in practice than contractual set-off, due to the nature of the conditions which must be satisfied.
How and when could an equitable right of set-off arise?
The following test can be applied to determine whether a party has a right to equitable set-off:
1) a formal requirement of close connection between the claim and cross-claim; and
2) a functional requirement where it would be unjust to enforce the claim without taking the cross-claim into account.
This test is not a two-stage test but one with two elements that cannot be separated from each other. The two elements ensure the test is based on principle and highlight that the basis of the set-off rule is fairness. The test will therefore be applied on a case-by-case basis.
Equitable set-off is more likely to be available where the cross-claim arises out of the same contract as the claim, than where the claim and cross-claim arise out of different contracts.
Geldof Metaalconstructie NV v Simon Carves Limited (2010) EWCA Civ 667
In Geldof, the Defendant relied on a cross-claim for damages for the Claimant’s repudiation of a contract (B) and was held to have established a right to set-off. The Court found that by demanding payment under contract A as a condition for continuing work under contract B, the Claimant had linked the two contracts.
What else can equitable set-off be used for?
Equitable set-off can be used not only as a defence for the claim but also as grounds to withhold payment of a debt. Set-off is not the same as a counterclaim. The right to set-off can only be used as a defence, protecting the party against a claim, whereas a counterclaim is a separate claim entirely.
If you are a party that is expecting payment, then it is a real advantage to include ‘a no right of set-off’ clause in the contract. This prevents payment from being withheld or held up because of a cross-claim, which ensures speedy payment. If there is no right of set-off, the other party will still be able to pursue their counterclaim but will not be able to use it as an excuse to delay payment due to you.
Contact us for a free consultation on the right of set-off
If you need any advice or further information regarding this article, please contact us. We offer a free initial consultation and if clients have a viable claim, we offer a variety of retainer options. Every case or potential case will be assessed, on its own merits.
If you have found this article interesting and would like to learn more about how Beeston Shenton Solicitors can help you please feel free to contact the writer, Iain Bould, at iain.bould@beestonshenton.co.uk or via the contact page on the website.
