Cross-Contract Set Off - What Is The View Of The Courts?

In the mêlée of day-to-day commercial relationships, how easy is it for clients to link contracts unwittingly and thereby create a cross-contract set off? In which direction is the court moving in this area and how alert need clients be when seeking to enforce payment?

Introduction

In June 2010 the Court of Appeal handed down a unanimous Judgment in the case of Geldof Metaalconstructie NV v Simon Carves Ltd ("Geldof") [2010] EWCA Civ 667. The Leading Judgment was given by Lord Justice Rix. In the Geldof case the Court of Appeal reviewed the Judgment of His Honour Judge Raynor QC sitting as a High Court Judge in the Manchester District Registry of the Technology and Construction Court and in particular issues relating to equitable set off and cross-contractual set off provisions.

In this paper, I investigate the two questions, how easy is it for clients to link contracts unwittingly and thereby create a cross-contract set off? and which direction are the Courts moving in this area and how alert need clients be when seeking to enforce payment? Before addressing these questions I set out the background to the law of set off, the equitable set off position prior to the Geldof decision and the law as it now stands following the decision in Geldof. I then look at how the Judgment of Lord Justice Rix affects the two questions.

Background to the law of set off

Before looking at the different types of set off, lets consider why set off is important. Set off is the ability of a debtor to reduce or eliminate entirely the debtor's liability to a creditor by taking into account monies owed by the creditor to the debtor. In litigation set off operates as a defence to a claim rather than a separate stand alone counterclaim. Commercially set off can be used not only as a defence to a claim, but also, to reduce or eliminate monies owed to another party. In construction we are all used to the Section 111 of the Housing Grants Construction and Regeneration Act set off notice. Indeed today this will be the most common type of set off used in the construction industry. A ground for withholding may be an equitable set-off. There are three main categories of set off:

Legal set off - a procedural remedy which applies only in litigation. It applies where there are mutual debts which are both due and payable at commencement of the action. The amounts of debts must be readily ascertained, therefore excluding unliquidated damages claims. The debts need not be connected, that is in relation to the same contract of the same subject matter.

Equitable set off - which is the issue we are looking at in this paper, is considered below. The old leading case of Rawson v Samuel1 held that equitable set-off was available as a defence when "the title of the Plaintiff to his demand is impeached". A classic example of this is a claim for unliquidated damages in negligence being used to set off a claim for monies payable under a contract. Equitable set off can be used not only as a defence for the claim but also as a grounds to withhold payment of a debt.

Insolvency set-off - The final form of set off is insolvency set off which derives from the Insolvency Act 1986 and the Insolvency Rules 1986. This relates purely to mutual dealings of the parties where one party is insolvent. This simply assists the creditor who might be otherwise required to pay debts owed to the insolvent party to avoid paying those debts. This is a separate breed of set off and not relevant to the questions raised in this paper.

Equitable set off pre Geldof - in his...