New Test for Set-Off of Counterclaims


The Court of Appeal has modernised the test to be applied when considering whether a counterclaim should be ‘set off’ against a claim.
The right of set-off of a counterclaim can be specified in a contract (as is typical in construction contracts) or, in some circumstances, under the law of equity.
Simon Carves Ltd. appealed against a decision by the Technology and Construction Court in which its counter-claim had been struck out. The other party, Geldof Metaalconstructie, had sued Simon Carves under a contract for installation, but there was also another contract between the parties, which related to the supply of good from Geldof to Carves. One of the conditions of the installation contract was the payment of the supply contract. Geldof, in insisting that the two contracts were interlinked in this way, had ensured that they were so closely related that it would be fundamentally unfair to ignore one contract while enforcing the other.
In addition, the supply contract contained a set-off clause which went further than the common law of set-off by allowing all 'amounts lawfully due' to be set against the installation contract price.
The result of this case is that courts should no longer apply the older test relating to set-off in these circumstances, which used to be whether the counterclaim 'impeached the claimant’s title'. The new approach is only to allow a counterclaim when two conditions have been satisfied – firstly, that it is closely connected with the claimant’s claim and secondly to allow it only in circumstances where it would be ‘manifestly unjust’ not to do so.
In this case the court ruled that it was not necessary that both conditions were satisfied because the wording of the contract was sufficiently clear as regards Geldof’s right of set-off.
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