A borrower's right of set-off may be excluded in loan and security documentation (subject to limited exceptions), with the commercial aim of the lender to secure payment, free from potential cross-claims. The recent Court of Appeal decision in Woodeson & Anor v Credit Suisse (UK) Ltd [2018] EWCA Civ 1103 provides helpful guidance as to the operation of such anti-set off provisions in the context of secured property. This decision is likely to be welcomed by both financial institutions and finance lawyers. It should contribute to the certainty of anti-set off provisions in mortgage documentation, thereby enhancing the security position of secured lenders.

Firstly, the Court of Appeal confirmed that the requirement to draw to the attention of a counterparty any "particularly onerous or unusual" provisions would not ordinarily apply to anti-set off clauses included in mortgage documentation. Distinguishing Interfoto Picture Library v Stiletto [1989] QB 433, the Court of Appeal commented that anti-set off clauses were "by no means unusual in mortgage transactions" and the contractual documentation containing the set-off clauses was signed by the claimants in the instant case. Where the contractual documentation is signed, the Interfoto principle will have no (or at least extremely limited) application as per Peekay v Australia and New Zealand Bank [2006] EWCA Civ 386.

Secondly, the Court of Appeal made significant obiter remarks on the application of the principle in Spencer Day v Tiuta International Ltd & Anor [2014] EWCA Civ 1246. The Court of Appeal confirmed that a mortgagor cannot - by asserting an equitable right of set-off - prevent a mortgagee from enforcing its security by taking possession of and selling the mortgaged property and recovering the mortgage debt (without giving credit for the mortgagor's claim) from the proceeds of sale. It said this was so, even if the cross-claim asserted by the mortgagor was sufficiently connected with the mortgage debt to satisfy the general test for an equitable set-off. The commercial reasoning behind this principle is that such mortgagor claims can only be pursued as freestanding claims for damages, as they are not claims which are secured on the mortgaged properties or the proceeds of sale thereof. To allow otherwise would in effect give the mortgagor a secured position (Samuel Keller (Holdings) Ltd v Martins Bank Ltd [1971] 1 WLR 43 (a first instance decision affirmed by the Court of Appeal)).

While obiter remarks do not have precedent value and are not binding, they may be persuasive in future cases. The obiter dicta here is likely to carry weight given that the comments were made by a Court of Appeal judge whose express and sole intention was to clarify the law in this area - the judgment of Leggatt LJ (concurring with the leading judgment given by Longmore LJ) was entirely devoted to clarifying the law in this area. Further, the court did not technically make any new finding of law, but rather consolidated previous decisions of the High Court and Court of Appeal.

It should be noted that one important limitation in relation to anti-set off provisions, is that parties are not permitted to contract out of the mandatory rules of insolvency set-off. Notwithstanding the anti-set off provisions in this case, the insolvency set-off rules would have applied if the claimants in these proceedings (who were individuals) had been declared bankrupt.

In addition to its findings on the anti-set off provisions, the Court of Appeal confirmed the position in relation to extending a time-barred claim where a declaration, rather than damages, is sought. In such cases, the court will look at the basis on which the declaration is sought and consider whether that base action is time-barred. As such, a claimant cannot seek a declaration, instead of damages, to improve its position if it would otherwise be time barred from bringing the cause of action.