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The facts

This proceeding was an appeal about rights of set-off. The appellant, SCL, was the main contractor for the construction of a bioethanol plant in Teesside. SCL contracted with the respondent, Geldof, to purchase pressure vessels for the plant in accordance with the terms set out in SCL鈥檚 purchase order (鈥渢he Supply Contract鈥�). 

SCL entered into a second contract with Geldof for the design, fabrication and installation of storage tanks at the plant site in accordance with the terms contained in an amended version of the FIDIC Yellow Book, 2003 third edition (鈥渢he Installation Contract鈥�).

Clause 24 of the Supply Contract was headed 鈥淩ight to Offset鈥� and provided as follows:

鈥淧urchaser, without waiver or limitation of any rights or remedies of Purchaser or Owner, shall be entitled from time to time to set off against the Purchase Order Price any amounts lawfully due from the Supplier to the Purchaser whether under this Purchase Order or otherwise.鈥�

On 12 November 2008, Geldof issued its invoice for part payment of the purchase price following delivery of the pressure vessels to site.  Under the Supply Contract, payment was due within 45 days.

The Installation Contract was terminated short of completion after SCL accepted an alleged repudiation by Geldof.  The alleged repudiation related to Geldof鈥檚 refusal to re-start works under the Installation Contract unless payment was received of the sums claimed in six invoices, four of which had been issued under the Installation Contract and two under the Supply Contract.  SCL alleged that this was an unlawful suspension and/or abandonment of the Works, or alternatively a suspension or abandonment without reasonable cause.

Geldof issued proceedings for payment of the invoices rendered under the Supply Contract.  SCL sought to rely of three separate set-offs, including the right to set off its counterclaim for damages for repudiation of the Installation Contract, being the cost to complete Gledof鈥檚 Works provisionally quantified at 拢5,311,118.

At first instance, the Judge sitting in the Technology and Construction Court held that SCL was entitled to set off a quantified amount for minor defects in the pressure vessels under the Supply Contract and liquidated damages under the Installation Contract.  SCL was not entitled to set off the amount claimed for repudiation of the Installation Contract and summary judgment was given against it for 鈧�1,329,437.55.  The trial of the counterclaim is yet to be held.

The issues

Was SCL entitled to set off its counterclaim for repudiation of the Installation Contract, either contractually or under the Court鈥檚 equitable jurisdiction, against amounts claimed by Geldof under the Supply Contract?

The decision

The Court of Appeal held that the test for equitable set-off is whether the cross-claim is so closely connected with the claimant鈥檚 demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.

There were a number of elements that linked the otherwise separate Supply Contract and Installation Contract.  There were practical links between the two contracts, but also by insisting on payment of the Supply Contract invoices as a pre-condition of returning to work on the Installation Contract, Geldof itself was bringing the two contracts into an intimate relationship with one another, even if unjustifiably.  That relationship became inseparable and irrevocable when SCL brought the Installation Contract to an end, in reliance on Geldof鈥檚 poor performance under the Installation Contract coupled with its insistence on prior payment. 

This made it manifestly unjust to enforce payment under the Supply Contract without taking into account the cross-claim for repudiation of the Installation Contract.

The Appeal Court also concluded that SCL should be entitled to use Clause 24 of the Supply Contract in construing the phrase 鈥渁ny amounts lawfully due鈥� as meaning amounts which are claimed to be due and are recognised or recognisable at law.  The counterclaim for unliquidated (but quantified) damages was recognised or recognisable at law even though it had not been adjudicated upon.

Comment

Set-off can be relied on as a defence to a claim if there is an express contractual right to set-off or if the test for equitable set-off is satisfied under the Court鈥檚 equitable jurisdiction.  This Judgment has simplified the test to be applied in this frequently argued area.

The refined test for equitable set-off adopted by the Court of Appeal requires a close connection between the claim and the cross-claim and a consideration of the justice of the case, but the connection does not have to be in relation to the same contract.

The Court of Appeal avoided labelling this a two-stage test but preferred to say that there is both a formal element in the test and a functional element, i.e. a close connection between the competing claims with an important functional element to ensure fairness (equity) in the outcome.

Full case details

Geldof Metaalconstructie NV (鈥淕eldof鈥�) v Simon Carves Limited (鈥淪CL鈥�) [2010] EWCA Civ 667

Andrew Hales is an associate at . He can be contacted on ahales@fenwickelliott.com and 020 7421 1986.