Court of Appeal Civil Division, June 2010
Simon Carves Ltd (SCL) was the main contractor for the building of a bioethanol plant in Teesside. It needed to procure pressure vessels and storage tanks for the works. Geldof Metaalconstructie (Geldof) was awarded both contracts. The contract for the supply only of the pressure vessels (the Supply Contract) was concluded in July 2007. The contract included a clause headed Right to Offset, stating that SCL “...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.”
The contract for the storage tanks (the Installation Contract) was concluded separately about six months later. Under this contract Geldof was responsible for supply and installation with completion set as November 2008. Unfortunately this contract did not proceed well. In August 2008 SCL wrote to Geldof alleging failure to proceed regularly and diligently.
In November 2008 Geldof delivered the pressure vessel and invoiced for the 30% due under the Supply Contract. Other invoices previously submitted by Geldof remained unpaid at this point. On 23 December 2008 Geldof wrote to SCL stating that it would not restart the Installation Contract unless the outstanding invoices were paid. On 30 December SCL issued a second notice of default to which Geldof reiterated that it would not restart unless the outstanding invoices were settled. In January 2009 SCL issued notice of termination under the Installation Contract for the storage tanks.
Geldof issued proceedings to recover the sum due under the Supply Contract. Against this sum SCL sought to set off for: defects in the goods under the Supply Contract; liquidated damages under the Installation Contract as a result of delays caused by Geldof; and unliquidated but provisionally quantified damages for repudiation of the Installation Contract.
The judge decided that the set off for defects was permissible and Geldof conceded the set off in relation to the liquidated damages. With regard to the set off for repudiation, the judge considered that this did not come within the definition of “all amounts lawfully due” within the set off clause in the Purchase Order and declined to allow this amount to be set off against Geldof’s claim.
SCL appealed. The Court of Appeal considered in detail the previous judgments regarding equitable set off, concluding that the test for allowing this is where “the cross-claims are so closely connected with the claimant’s demands that it would be manifestly unjust to allow it to enforce payment without taking into account the cross-claim”.
The Court concluded that while the contracts were separate they did concern the same site and, more important, the actions of Geldof by refusing to complete the Installation Contract until invoices under the Supply Contract had been paid brought the contracts into relationship with each other.
Furthermore, the fact that the pressure vessels supplied would be of no use to SCL in the absence of performance by Geldof under the Installation contract also made it unjust to enforce payment under one contract without permitting set off from the other. The appeal was upheld.
It is common for parties, including contractors and subcontractors, to be employed on several separate contracts at any one time. Subcontractors in particular may also have separate orders for different elements on the same site.
Set off is the principle which allows the party facing a claim to withhold money otherwise due. The ability to set off amounts arising under different contracts can arise where there are express contractual provisions or it is permissible by virtue of equitable set off.
This case clarifies that the test to permit equitable set off relies on the close connection of claims and manifest unjustness and also highlights that the conduct of a party may create the necessary connection between what may initially be seen as separate contracts, thereby extending liability. It also shows that set off rights can be extended to include claims for unliquidated damages and claims arising under other contracts.
Garry Winter is a senior consultant with Knowles, a Hill International company. Tel: 01962 842929