Excluding rights of set-off and when sums are due
AMC III Purple v Amethyst Radiotherapy (High Court) [2019]
Rights of set-off are, as the term suggests, rights to ‘set-off’ one counterclaim or possibly just monies owed against another primary claim. Two rights of set-off exist under English law namely ‘legal set-off’ and ‘equitable set-off’. Legal set-off is only available during the course of active litigation and only in respect of quantified sums. Equitable set-off on the other hand is, in some respects, more flexible. Equitable set-off is available outside the context of litigation where the cross-claim arises from the same transaction (or a closely related transaction) as the debt owed. Importantly, equitable set-off can apply to a claim which is unliquidated (i.e. uncertain) but ‘provisionally quantified’. Typically, suppliers and service providers routinely exclude rights of set-off in order to ensure that customers cannot withhold payment in the event of a dispute arising
Facts:
The parties entered into a loan arrangement. AMC was a shareholder in the Borrower. The finance documentation contained the following clause “"All payments to be made by the Borrower under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim." There was a supplemental agreement which had similar wording “Each payment to be made by the Borrower under this Agreement will be made in full, without any set-off or deduction."
AMC and the Borrower became embroiled in a dispute about the way in which the Borrower was being run and what the borrowed funds were to be used for. As a result the Borrower failed to make certain quarterly interest payments. It claimed it was entitled not to make the payments because it had an equitable set-off right in respect of certain claims it had against AMC.
Decision:
The court held that even if the Borrower had valid cross-claims against the lender it was not entitled to set them off against any interest payments falling due nor make any deduction from those payments. In doing so the court followed an earlier judgment in which it was held that a set off clause with similar wording excluded both legal and equitable set off.
The judge said the wording made it impossible to argue that certain payments were not actually "due" (in other words they were not ‘to be paid’) because they were subject to equitable set off. The judge quoted a previous decision in which it was said “"the average businessman who was told that a clause of this kind applied to legal set-offs but not equitable set-offs would hardly be able to contain his disbelief". Quite whether the average businessman would know anything about rights of set-off at all must be open to question!
The no set off clause in the supplemental agreement was not identical but the court found that the use of the word "any" meant that equitable as well as legal set off was excluded.
Points to Note:
- Rights of set-off are important self-help remedies and can help significantly in shifting the balance of power in the event of a dispute. Contracting parties would be well advised to be aware of what rights of set-off may apply if the contract in question is silent on the point.
- Pay attention to what the contract says about express contractual rights of set-off (in favour of the customer) or exclusions of rights of set-off (in favour of the supplier).