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Tue October 20 2020

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Equitable Set-Off Test

23 Jun 10 Simon Carves applied to set off a counterclaim for damages for repudiation of an installation contract made with the respondent, Geldof Metaalconstructie NV (“Geldof”), against Geldof’s’ claim for the price of equipment which it,

Simon Carves applied to set off a counterclaim for damages for repudiation of an installation contract made with the respondent, Geldof Metaalconstructie NV (“Geldof”), against Geldof’s’ claim for the price of equipment which it, Simon Carves had bought from Geldof under a separate supply contract. There were two contracts between the parties: one for supplying pressure vessels and one for installation works.

Simon Carves issued a notice of default, alleging that Geldorf had failed to proceed regularly and diligently with the contract. Simon Carves was due to pay Geldorf’s invoice by 27 December 2008, but failed to do so. Geldorf made it clear that it would not recommence the installation works unless it was paid 6 outstanding invoices; 4 in respect of the installation contract and 2 in respect of the supply contract.

Simon Carves treated Geldorf’s failure to return to the site was an abandonment of the contract or, alternatively, an unlawful suspension. Simon Carves purported to accept Geldorf’s repudiation of the contract. Simon Carves maintained that it was entitled at common law to rely upon Geldorf’s breaches.

The judge had allowed Simon Carves two of the three set-offs it claimed, but not its counterclaim for liquidated damages of £5.3m for repudiation of the installation contract.
On appeal, the court examined previous authorities and the connection test to be applied before Simon Carves could be allowed to set off its counterclaim. A close connection between the contracts was required, and it has to be unjust to enforce a claim without taking into account any cross claim.

Applying the test to the present case, the formal links between the two contracts, even though formally separate contracts, could not be underestimated. The vessels supplied under the supply contract were of no use without the works under the installation contract being properly performed. It would not be fair for Geldorf to be able to enforce payment under the supply contract, if Simon Carves’ responsibilities under the main contract were prejudiced. This was particularly so where payment was to be triggered by the arrival of the vessels on site. Geldorf itself had brought together the two contracts by insisting that it be paid the supply contract invoices before returning to site to undertake the installation works. In addition, clause 24, rather than restricting Simon Carves’ entitlement to set-off as many contractual clauses did, actually extended its common law right to set-off. Simon Carves’ appeal was allowed.

Geldof Metaalconstructie NV v Simon Carves Ltd.,
[2010] EWCA Civ 667 

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