The Court of Appeal has held that a settlement agreement, in which the defendant acknowledged that a debt was payable in full and agreed the mechanics and timing of payments, had the effect of excluding the defendant’s right of equitable set-off: IG Index Ltd v Ehrentreu [2013] EWCA Civ 95. The claimant was therefore entitled to summary judgment on the debt. The defendant however remained free to pursue his cross-claim for damages against the claimant.

This decision is surprising in suggesting that a right of set-off may be excluded by implication where an agreement sets out not only the quantum of a liability but also the mechanics of how and when the debt is to be paid. This is contrary to previous authority to the effect that if set-off is to be excluded by contract, clear and unambiguous language is required. Parties who wish to exclude the possibility of set-off would therefore be well-advised to include an express contractual provision to that effect. Equally, where it is intended that there should be a right of set-off, it would seem sensible to say so expressly.

Legal background

Where a defence of set-off is available, the defendant cannot be required to pay the claimant’s claim in full but is entitled to deduct the amount of its cross-claim to reduce or extinguish the claim. This can have important implications for cash flow, as well as where the claimant is in financial difficulties (but not yet in liquidation, certain types of administration or bankruptcy, where mandatory set-off rules apply).

As the court noted in the present case, there are two main types of set-off:

  • Legal set-off, which is confined to liquidated debts which were due and payable at the time the defence of set-off was filed, and which does not require any connection between the subject matter of the claim and the cross-claim.
  • Equitable set-off, which may apply to unliquidated claims but (as established in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667) will only be available where the cross-claim is so closely connected with the claimant’s claim that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.

Facts

The underlying dispute related to an agreement for spread-betting. One of the defendant’s bets went disastrously wrong and as a result the defendant’s account was over £1.2 million in debit. The parties entered into a settlement agreement in which the defendant acknowledged that the debt was properly due and owing in its entirety and agreed to pay the debt by way of an initial payment by an agreed date plus minimum monthly instalments thereafter.

The claimant sought summary judgment for sums due under the settlement agreement. The defendant counterclaimed for breach of contract and breach of statutory duty and also relied on the counterclaim by way of equitable set-off as a defence to the claim. The Court of Appeal considered, among other issues, whether the settlement agreement excluded the right of equitable set-off.

Decision

The court held that the settlement agreement did exclude the right of equitable set-off. Lord Justice Lewison (with whom Toulson and Laws LJJ agreed) said the following:

  • Where equitable set-off applies, all that is legally due is the net balance; therefore, the acknowledgement that the whole debt was due pointed towards that conclusion, though he could see the force of the argument that on its own it was not clear enough.
  • The settlement agreement addressed not only the amount to be paid but also the mechanics and timing of payments. So as well as liability it also dealt expressly with cash flow, with which all forms of set-off are concerned.
  • The combination of these elements pointed inexorably towards the conclusion that, as a matter of interpretation, the settlement agreement excluded any right of set-off in respect of the cross-claim.

The settlement agreement did not however extinguish the defendant’s cross-claim, which he remained free to pursue against the claimant.

Comment

This decision suggests that an agreement which deals with mechanics of payment, as well as quantum, may be interpreted as excluding any right of equitable set-off by the paying party. This may be seen as both surprising and potentially wide-ranging; most agreements which provide for a payment to be made are likely also to deal with the mechanics of how and when payment is to be made.

Despite this decision, however, parties who wish to exclude the possibility of set-off would be well-advised to include an express contractual provision to that effect. There are a number of previous authorities in which it was held that, if set-off is to be excluded by contract, clear and unambiguous language is required – see for example the House of Lords decision in Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689 at 717, 722–3. But equally, in light of the present decision, it would seem sensible to preserve a right of set-off expressly where this is the parties’ intention.