Geldof Metaalconstructie NV v Simon Carves Ltd

An equitable set-off is available where the claim and cross-claim are so closely connected that it would be manifestly unjust to enforce the claim without taking account of the cross-claim. Close connection and injustice are formal and functional aspects of a single equitable inquiry, rather than two separate stages.

Separate contracts may satisfy that inquiry. This may occur where a party makes payment under one contract a condition of continuing performance under the other. A contractual right to set off amounts lawfully due, whether under the contract or otherwise, may extend to a legally recognisable but unadjudicated claim for unliquidated damages.

Geldof Metaalconstructie NV supplied pressure vessels to Simon Carves Ltd under a supply contract. It also entered a separate installation contract for storage tanks at the same bioethanol plant.

Geldof claimed an unpaid invoice under the supply contract. Simon Carves alleged that Geldof had repudiated the installation contract after making payment of supply-contract invoices a condition of restarting the installation works. It counterclaimed for the resulting damages and sought to set that claim off against the invoice.

HHJ Raynor QC gave summary judgment for Geldof, holding that the repudiation counterclaim was neither an equitable set-off nor an amount lawfully due under the contractual set-off clause. Simon Carves appealed.

1. Appeal allowed. The Court quashed the summary judgment. Simon Carves had an arguable counterclaim which could be set off against Geldof’s supply-contract claim.

2. Rix LJ, with whom Patten and Maurice Kay LJJ agreed, held that the modern test for equitable set-off is whether the cross-claim is so closely connected with the claimant’s demand that it would be manifestly unjust to enforce payment without taking the cross-claim into account. The obsolete metaphor that a cross-claim must impeach the claimant’s title should not be used. The inquiry has a formal element of close connection and a functional element of justice, but these are not separate stages.

3. The two contracts were formally separate, but Geldof had itself brought them into an intimate relationship by requiring payment of the supply-contract invoices before it would resume the installation works. If that conduct amounted to repudiation, the resulting counterclaim arose from Geldof’s use of its supply-contract claim. The close practical links between the contracts reinforced the conclusion that it would be manifestly unjust to enforce the invoice without account of the counterclaim. This was consistent with the approach in Dole Dried Fruit and Nut Co v Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309.

4. The respondent’s new submission that there could have been no acceptance of repudiation was rejected. A repudiation may be accepted without reasons, or despite incorrect reasons, and it was arguable that repudiation could be accepted where a contract was also ended under an express contractual termination right: Stocznia Gdynia SA v Gearbulk Holdings Limited [2009] EWCA Civ 75.

5. Clause 24 independently permitted the set-off. Its reference to all amounts lawfully due, whether under the purchase order or otherwise, was intended to add to common-law rights. Construed in its commercial setting, it covered amounts claimed and recognisable at law, including unliquidated damages not yet adjudicated or agreed. It was therefore unnecessary to decide the appeal solely by equitable set-off.

• Court of Appeal (Civil Division): Allowed Simon Carves Ltd’s appeal and quashed the summary judgment for Geldof Metaalconstructie NV.
• Technology and Construction Court, High Court: HHJ Raynor QC gave Geldof summary judgment for €1,329,437.55, while allowing only two smaller counterclaims to be set off pending trial.