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How to set-off - legally and equitably

In the recent case of Gary Fearns (T/A Autopaint International) v Anglo-Dutch Paint & Chemical Co Ltd & 5 Ors [2010] EWHC 2366 (CH) the Court undertook a cogent analysis of the law of set-off.

In particular, the proper application of the doctrine of equitable set-off to extinguish competing liabilities and approach to employ when ordering set-off between differing currencies. The Court distilled the following principles: 

  1. Where one party has a claim against another party who has a cross-claim, the two claims cannot be netted off so as to extinguish the respective liabilities arising between the parties except by agreement or a court judgment and only once both liabilities have been established by the same. 
  2. Where both claims were for specific and certain sums of money, it was open to the parties to plead legal set-off thereby raising a defence to the extent of its own claim in proceedings brought by the other. 
  3. An equitable set-off could be relied upon by either party, where the two claims were made reasonably and in good faith and were so closely connected that it would be manifestly unjust to allow enforcement of one claim without taking into consideration the other. 
  4. Outside proceedings, an equitable set-off could act as an immediate answer to a liability to pay money otherwise due and to the exercise of rights, such as a right to terminate a contract, which were contingent on such non-payment. 
  5. The existence of and reliance upon a right of equitable set-off by one party to a claim did not reduce or extinguish the other party’s cross-claim. Rather it operated as a shield preventing each party from enforcing its claim while the other still subsisted. 
  6. The court had discretion under CPR r.40.13 and its inherent jurisdiction to order any judgment sum to be netted off against any other sum, costs included. The effective date for such a set-off would be the date on which the existence and amount of the two liabilities arose. 
  7. The approach to be adopted when ordering set-off between amounts payable in different currencies was to assess and add to each principle amount any interest accruing up to the date of the set-off. The smaller amount would then be converted into the currency of the larger amount at the exchange rate prevailing at that date; and finally to order payment of the balance.

Elizabeth Dwomoh / 1st Nov 2010


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