May a contractor set off an overpayment arising on one contract against sums due on a separate contract for a subcontractor's work?
Withholding an undisputed debt against contested claims on another contract needs a route of set-off. There are four, and most contested construction claims fit only one of them.
Only on one of four bases: the insolvency of the party owed, a legal set-off of liquidated and undisputed mutual debts, an equitable set-off where the contracts are so closely connected that it would be manifestly unjust to ignore the cross-claim, or an express set-off clause; an undisputed debt cannot otherwise be withheld against contested claims on a separate contract
Only on one of four bases. First, insolvency: where the party owed is insolvent, cross-claims are set against the debt under the insolvency set-off rules, as in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd, where the Court of Appeal left the summary judgment standing but stayed execution of it because the payee was in liquidation. Second, legal set-off, available between solvent parties only for mutual debts that are liquidated and undisputed, which rarely fits contested construction claims. Third, equitable set-off, which reaches unliquidated cross-claims but only where the contracts are so closely connected that it would be manifestly unjust to enforce payment without taking the cross-claim into account: in B Hargreaves Ltd v Action 2000 the connection was not close enough and the plea failed, while in Geldof Metaalconstructie NV v Simon Carves Ltd a supply and an installation contract were closely connected and the set-off was allowed. Fourth, an express set-off clause, such as GC/Works/1 condition 51. Without one of these routes, an undisputed debt cannot be withheld against contested claims on a separate contract.
| Insolvency | Cross-claims set against the debt where the payee is insolvent |
| Legal set-off | Only liquidated, undisputed mutual debts; rarely fits contested claims |
| Equitable set-off | Needs contracts so closely connected it would be manifestly unjust to ignore |
| Hargreaves, Geldof | Connection too weak in one; close enough in the other |
| Express clause | A set-off clause such as GC/Works/1 condition 51 |
The problem
A contractor that owes a subcontractor an undisputed sum sometimes refuses to pay, arguing that claims or overpayments on other contracts between them exceed the debt. Whether it can withhold the undisputed sum against contested claims on a separate contract depends on which route of set-off is available, and there are only four.
Insolvency set-off
The first route is insolvency. Where money is owed to a party that is insolvent, claims against that party can be set against the debt under the insolvency set-off rules, sometimes called statutory set-off or mutual dealings.
The Court of Appeal dismissed the paying party's appeal and declined to set aside the summary judgment Dyson J had given, because the effect of the insolvency set-off rule had not been argued below or raised in the notice of appeal. It stayed execution of the judgment instead. The principle it stated is that where the payee is in liquidation and the payer has cross-claims, the account must be taken under the insolvency set-off rules, so summary judgment is not appropriate.
Legal set-off
The second route is legal set-off, available where both parties are solvent. Money owed can be reduced by debts that are due and payable between the same parties, but legal set-off applies only to mutual debts that are liquidated and readily ascertained, and not where the sum to be set off is disputed. In the field of contested construction claims that is an unlikely route, because the cross-claim usually has to be assessed before it can be known.
Equitable set-off
The third route is equitable set-off, which reaches unliquidated cross-claims but only where the claims are closely connected.
Twelve subcontracts existed between the same parties, and the subcontractor was due sums under three interim certificates. The contractor withheld payment, alleging overpayments on other contracts, and claimed an equitable set-off. To set off the overpayments, the Court of Appeal held, the other contracts had to be closely and inseparably connected with the one under which the certificates were due, applying the test that the cross-claim must be so closely connected with the demand that it would be manifestly unjust to enforce payment without taking the cross-claim into account. On the facts the connection was not close enough, and the plea failed.
A supply contract and an installation contract between the same parties were held closely enough connected for equitable set-off. The Court of Appeal treated the test as having both a formal element, a close connection between the claims, and a functional element, that it would be manifestly unjust to ignore the cross-claim. That party had itself brought the two contracts into an intimate relationship by making payment under the supply contract a condition of returning to work on the installation contract, so the set-off was allowed.
Express set-off
The fourth route is an express set-off clause. A contract can give a party the right to set off sums due on one contract against sums due on another, and some main contracts do so in wide terms, GC/Works/1 giving the employer such rights in its condition 51, with reciprocal rights for the contractor. Where such a clause applies, the set-off operates on its own terms without needing to satisfy the equitable test.
Practical steps
Identify which of the four routes you are relying on: insolvency, legal set-off, equitable set-off, or an express clause.
Do not withhold an undisputed debt against a contested claim on a separate contract without one of these routes.
For legal set-off, the cross-debt must be liquidated and undisputed; a contested claim will not qualify.
For equitable set-off, show that the contracts are so closely connected that it would be manifestly unjust to ignore the cross-claim.
If cross-contract set-off matters to you, put an express set-off clause in the subcontract at the outset.
Authorities
| Authority | Citation | What it decides |
|---|---|---|
| Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd | [2000] EWCA Civ 507 | Summary judgment was not set aside, but execution of it was stayed, where the payee was in liquidation and the payer had cross-claims; the account had to be taken under the insolvency set-off rules |
| B Hargreaves Ltd v Action 2000 | (1992) 62 BLR 72 | To set off overpayments on other contracts, those contracts had to be closely and inseparably connected with the one under which payment was due; on the facts the connection was too weak and the equitable set-off failed |
| Geldof Metaalconstructie NV v Simon Carves Ltd | [2010] EWCA Civ 667 | Equitable set-off requires a close connection between the claims and that it be manifestly unjust to ignore the cross-claim; a supply and an installation contract were closely connected where the payee made payment under one a condition of returning to the other |