Geldof Metaalconstructie v Carves

A good case note from Olswang.

The Court of Appeal in Geldof Metaalconstructie NV v Simon Carves Ltd recently took the opportunity to clarify the test on equitable set-off, which has been the subject of some uncertainty, particularly in relation to cross-claims brought under separate contracts.

Simon Carves Ltd ("SCL"), the main contractor in a bioethanol plant construction project, was seeking to set off its counterclaim for damages for repudiation by Geldof of a contract with SCL for installation of storage tanks, against a claim by Geldof for overdue payment from SCL under a separate contract for supply of pressure vessels. While both contracts related to the construction project, they were standalone contracts and were concluded at separate times.

There was a contractual set-off clause in the supply contract. However, the main issue discussed by Rix LJ in giving the judgment of the court was whether SCL was entitled to set off its counterclaim under the right of equitable set-off. In doing so, Rix LJ clarified the correct legal test to be applied.

The modern starting point of the law of equitable set-off is the decision of the Court of Appeal in Hanak v Green [1958] 2 QB 9. In Hanak, Morris LJ held that equitable set-off was available: (a) if it would be "manifestly unjust" to enforce the claim without regard to the cross-claim; and (b) if there was a "close relationship between the dealings and transactions which gave rise to the respective claims".

The cases following Hanak, however, have not all been clear over how close this "close relationship" must be in order to satisfy the test, particularly for cross-claims brought under separate contracts.

• Some cases have held that the cross-claim must flow out of the same transaction or be closely connected with it (Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1978] 2 QB and Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938);
• Others have gone further and required that they also be "inseparably connected" (Bank of Boston Connecticut v European Grain and Shipping Ltd (The Dominique) [1989] AC 1056, Dole Dried Fruit and Nut Co v Trustin Kerwood Ltd [1990] 2 Lloyd's Rep 309.
• There has also been a suggestion that the former "impeachment of title" test (a requirement that a cross-claim should be so closely connected that it impeaches the claimant's demand) is still relevant (Leon Corporation v Atlantic Lines and Navigation Co Inc (The Leon) [1985] 2 Lloyd's Rep 470).

Rix LJ reviewed the authorities and confirmed that there was no longer any place for the former "impeachment of title" test. He stated that the test to be applied was a single test with both a formal and a functional element:

• Formal element: there has to be a close connection between the claim and the cross-claim; and
• Functional element: it needs to be unjust to enforce the claim without taking into account the cross-claim.

Rix LJ acknowledged that the authorities expressed the formal element of the test in different ways, of which the "inseparable connection" test was only one formulation, and observed that that formulation was not especially helpful in cases involving separate contracts.

See

• Set-off
• Equitable set-off