Geldof Metallconstructie NV v Simon Carves Ltd  EWCA Civ 667
Rix LJ in the Court of Appeal has clarifi ed and slightly revised the test as to when a party is entitled to set-off a counterclaim under the right of equitable set-off.
Carves sought to set off a counter-claim brought under a storage tank installation contract, against a claim brought by Geldof under a different contract for supply of pressure vessels. While the claims were brought under different contracts, they both related to the building of a bioethanol plant for a third party in relation to which Carves was the main contractor.
Although the supply contract contained a set-off clause, citing uncertainty on the subject, Rix LJ took the opportunity to examine the jurisprudence on equitable set-off in some detail. He concluded that there was a formal requirement of close connection between the claims, so that the doctrine has a basis in principle and not discretion, and a functional requirement of justice and fairness to remind litigants that the ultimate rationality of the regime is equity.
On that basis, he re-stated Lord Denning’s test in The Nanfri  2 QB as follows: a cross-claimant has a right of equitable set-off in respect of “cross-claims… so closely connected with [the plantiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim”. Applying this to the facts, he found that the two contracts were both dedicated to the bioethanol plant project and that Carves was entitled to assert a right of equitable set-off.
In reaching his conclusion, Rix LJ helpfully confi rmed that there is no requirement for a cross-claim to arise out of the same contract as the claim in order for the cross-claimant to take advantage of the defence of equitable set-off. Each case will turn on its own facts as to the closeness of the connection between the claims. This is a useful clarifi cation. It should put to bed the notion that there is a requirement that the cross-claim must “impeach the plaintiff’s demand”. The cross-claim does not have to address the initial claim directly – there merely has to be a close connection when all the circumstances of the case are considered.