Crucial Issues Around Cross-Contract Set Off

Scotland

Contractors often work on a number of contracts for the same client at the same time. Normally, even if one job goes wrong, this won’t stop them from being paid on the other - the general principle being that each contract and the issues around it will be treated separately.

Everyone is familiar with set off or withholding within the same contract where there are cross claims. But what about between two contracts? When does set off apply there? Sometimes the contract itself will have a clause dealing with “set off”. Otherwise the common law rights of set off may apply. There are generally three different types of set off:

1. where the two debts are each clearly due;
2. where one goes to reduce the other - for example, under the same contract; and
3. general equitable right of set off.

Two separate, but closely connected, subcontracts

In the recent case of Geldof v Simon Carves, the Court had to consider whether Simon Carves was correct in holding back payment under one contract because of, as yet unproved, claims under another contract.



Geldof was the subcontractor on two separate subcontracts to Simon Carves - one for supply of pressure vessels, the other for installation of storage tanks.



Although on the same site, they were concluded at separate times. Geldof sued for the balance of the price under the supply contract to be met with a claim by Simon Carves for set off on the installation contract.



The claim by Carves under the installation contract included a claim for unliquidated damages as a result of Geldof “downing” tools when not being paid under the supply contract. There was a set off clause in the contract which allowed set off of sums “lawfully due”. This was not limited to sums due under that contract and the Court, on appeal, found that this clause included unliquidated damages for walking away from the installation contract.



Equitable set off

Separately, the Court looked at whether, regardless of this clause, the doctrine of equitable set off would have allowed such set off. They decided it would.



This is because it was found, as the vessels supplied were of no use unless the installation contract was properly performed, that the contracts were sufficiently closely connected and it would be inequitable not to allow set off.



So what can be learned from this as to when cross-contract set off can operate?

First of all, check the terms of the contract. Does it deal with and allow this? If not, might it still be argued the operations under each of the two contracts where set off is being claimed are so closely connected as to make that ‘set off’ equitable?